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To: Les H who wrote (10250)	4/15/2004 2:36:27 PM
From: Les H	Read Replies (1) \| Respond to of 29601

The core of inflation Some may immediately dismiss expectations of higher interest rates when identifying the slack in US factories and labor markets. Capacity utilization stands at 75.2%, down from the 82-83% range prevailing at times of a cyclical peak. Core inflation stands at 1.2%, the lowest since 1966. But the figures are clearly brought down by rents and used vehicles. These two items were mainly negative due to consumers' rising demand for new homes due to low interest rates and increased demand for new cars resulting from auto-dealer incentives. A Fed study estimated that between November 2001 and December 2003, the aggregate contribution of rent and used vehicles to CPI fell 1.1 percentage points, which is a significant portion of the 1.6 percentage point decrease in core CPI. Yet if those two items were held constant between November 2001 and December 2003, core CPI would have stood at 2.3%, which would translate in an inflation rate of nearly 3% when factoring in food and energy, a rude augury for the bond market. The difference in core prices is not as perceptible in the Personal Consumption Expenditure Price Index--the Fed's favored measure of inflation-mainly because the weigh of housing in the CPI comprises a far larger share (40%) than it does in the PCEPI. Tomorrow's CPI figure is expected to show inflation to have risen by 0.3% in March, and 0.2% when excluding food and energy. But markets' improved grasp of the evolving realities of inflation has produced an upward bias of inflation expectations, particularly as Treasuries traders attempt to live with a 1.00% fed funds rate during an 10-month period where GDP growth is expected to have risen from 3.1% in Q2 2003 to nearly 4.5% in Q1 2004, and where oil prices have jumped 50% from their 2003 lows. There will be more current information on prices amid manufacturers at Thursday's release of the April Philadelphia Fed index, where the latest prices paid index stands at 9-year highs. The resulting backup in bond yields and the dollar's appreciation against the European currencies continue to go hand in hand, which is in line with our month-end forecasts of $1.1830, $1.82 and 1.3220 for EURUSD, GBPUSD and USDCHF respectively. (see forecasts in 4/6/2004) forexnews.com