Inflation: Up, down or sideways?
Contradictions seen in upcoming CPI, PPI reports
By Rex Nutting, MarketWatch
Last Update: 5:00 AM ET Aug. 14, 2005
WASHINGTON (MarketWatch) -- Anyone who bought gasoline last month probably thought inflation had gotten completely out of control.
But anyone who bought a car, a computer or some clothing must have thought higher prices had been outlawed.
Welcome to the bizarre world of the U.S. economy, where inflation and disinflation coexist in an unstable and volatile relationship.
The government will report on consumer prices and wholesale prices for July in the coming week. The two inflation reports will be the highlight of a relatively busy week on the economic calendar
The focus in the market will be back on the data in the absence of Fed Reserve meetings, Fed speakers or Treasury auctions.
Economists believe that inflation in July rose for the first time in three months, while so-called core inflation ticked modestly higher.
"Brace for another jolt from soaring gasoline prices," said Lynn Reaser, chief economist for Bank of America Investment Strategies Group.
Gasoline prices surged in July, rising about 14 cents from June's average to about $2.33 a gallon. But plunging new car prices will offset some of the shock of pump prices.
Economists say the consumer price index likely rose about 0.4% in July, with the core rate (which excludes food and energy) increasing about 0.2%, according to the survey conducted by MarketWatch. The data will be released on Tuesday at 8:30 a.m. Eastern.
That would leave the core CPI up 2.2% in the past year, just above the Fed's tolerance band and suggesting that "the Fed will continue raising rates this year," said Joseph Abate, senior economist for Lehman Bros.
There are risks to the forecast each way: The upside surprise could come from lodging prices, which have fallen for three straight months, contrary to anecdotal reports from the industry.
The downside surprise could come from auto prices, which could fall more than economists expect due to technical factors in the way the government accounts for various kinds of discounts.
PPI
The main storyline is similar for the producer price index, which will be released on Wednesday at 8:30 a.m. Eastern. Economists say the PPI likely climbed 0.5% in July, with core prices up 0.1%.
It's all about the Fed and its Open Market Committee, which seems to be just as confused as consumers are. Are prices going up, down or sideways?
"In one sentence, the FOMC directive presented three views of inflation," complained Ethan Harris, chief economist for Lehman Bros. First, the FOMC said core inflation had been "relatively low," then it said inflation expectations were "well contained," and then it said inflationary pressures "have stayed elevated."
The Fed's statement makes a bit more sense if you look at it as presenting the Fed's views on inflation in the past, present and future. Core inflation has been low in the past few months, inflationary pressures are now elevated, but expectations remain subdued, in part because the Fed has been busy ratcheting interest rates higher.
While the financial markets are likely to react vehemently to any big deviation from the consensus estimates on the CPI or PPI, the Fed itself isn't likely to get too exercised by one number.
"Our sense is that most measures of inflation are drifting higher, and the Fed's concern is a bit deeper than merely the level of a particular price measure," said Abate.
Wages
The Fed thinks inflationary pressures are elevated not because of oil prices, but because of wage pressures. As Michael Swanson, chief economist for Wells Fargo, said, "Oil can't cause widespread inflation all by itself."
So far, inflationary pressures from wages have been almost impossible to find.
Average hourly earnings for the bottom 80% of the work force have not been keeping up with inflation. Real earnings are no higher than they were when the recession ended nearly four years ago.
Depressed wages are actually a drag on inflation, because firms cannot raise prices too much faster than consumers' incomes rise.
At the same time, productivity has soared, with the typical worker producing about 12% more per hour worked than at the end of the recession in 2001.
As a result, corporate profits soared as a percentage of national income.
The latest data show labor may be regaining some of its share of national income.
Unit labor costs, which measure how much firms must pay labor for each unit of output, have increased 4.3% in the past year, after falling for most of the previous three years.
With productivity slowing and unit labor costs rising, some economists are predicting the Fed will keep raising interest rates until they begin to restrain economic growth.
In his recent testimony to Congress, Alan Greenspan cited rising unit labor costs as the major threat to the Fed's commitment to price stability. His discussion of energy prices, on the other hand, concentrated on their capacity to slow the economy, not on the inflationary threat.
When it comes to inflation, the Fed chairman is more worried about the size of your paycheck than he is about the price you pay at the gas pump.
The other data
The housing market remained hot in July, economists say. Housing starts probably increased slightly to 2.04 million seasonally adjusted annual units from 2.00 million in June, the survey says. The data come out Tuesday at 8:30 a.m., the same time as the CPI report.
Just 45 minutes later, the Fed will report on industrial production for July. Economists expect output to increase 0.5% in July after a 0.9% gain in June. With July temperatures some of the hottest in the past century, utility output probably soared again.
More timely reports on August manufacturing activity will come on Monday from the New York Fed and on Thursday from the Philadelphia Fed. Economists expect the two indexes to converge in August, pointing to a strong national report in two weeks from the Institute for Supply Management.
Rex Nutting is Washington bureau chief of MarketWatch. |
