Price Index Moderated in August
By EDUARDO PORTER
What a difference a few weeks make.
A month ago the economy seemed to be in dire straits — wedged in by the inflationary pressures of soaring energy prices and rising labor costs while threatened by the prospect that the weak housing market would decimate consumer spending.
But yesterday, the government reported that consumer prices rose only 0.2 percent in August, pushing annual inflation to 3.8 percent, the lowest since April. Meanwhile, retail sales rose by a respectable rate of 0.2 percent in August. And in September, consumers’ confidence about the future increased sharply.
The changes largely reflected declining gasoline prices, which not only dragged down inflation but also left consumers with more money.
The data suggests pricing pressures may have peaked. To many economists, this means that the Federal Reserve will probably maintain its benchmark interest rate at 5.25 percent at the meeting of its rate-setting committee next week.
“The economy appears to be leveling off,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “My sense is that we will dodge the bullet regarding inflation.”
There are potential pitfalls on the horizon. A steeper decline in housing prices could slam the brakes on consumer spending and curtail economic growth.
But, so far, while the pace of consumer spending has slowed, it is by no means plummeting.
“Supply and demand are more balanced now,” said Steven Wieting, an economist at Citigroup.
For months, the economy has been poised between competing forces pulling in different directions.
The economy has slackened, slowed by higher interest rates and a weakening housing market. Yet despite slower growth, energy prices continued to push inflation higher. Wages, which have inched up consistently over the last year, have threatened to put additional pressure on prices.
Indeed, the index of core prices, the gauge most closely watched by the Fed, which excludes the unstable prices of food and energy to provide an indication of underlying inflation, rose 2.8 percent in August compared with the year before, the fastest annual pace since November 2001.
The economic tug of war left the Fed and its chairman, Ben S. Bernanke, in a tight spot. Having increased interest rates by 0.25 percent at each of 17 consecutive meetings since June 2004, the Fed decided last month against tightening monetary policy more.
But with core price inflation still way above Mr. Bernanke’s stated “comfort zone” of 1 to 2 percent, many economists said they were worried that the Fed had stopped too soon.
If the 1 to 2 percent range “is a credible forecast, the Fed has to do something about it,” said Allan H. Meltzer, a professor of political economy and public policy at Carnegie Mellon University. “We are certainly not moving towards 1 to 2 percent inflation.”
Jeffrey M. Lacker, governor of the Federal Reserve Bank of Virginia, took the unusual step of dissenting, voting against the decision to stop increasing rates at the Fed meeting last month.
The more benign inflation figures in August appear to support the Fed’s stance. Mr. Wieting said energy prices in the price index should also fall steeply in September. That is because the August data referred to prices midmonth and thus missed most of the recent fall in the price of gas, which declined by 30 cents a gallon, to $2.67, from Aug. 21 to Sept. 11.
Falling gasoline prices are also affecting inflation expectations. According to the University of Michigan’s preliminary reading of consumer sentiment, reported yesterday, expectations of inflation one year ahead declined to 3.1 percent from 3.8 percent a month ago.
Core prices are not likely to follow energy prices down immediately. But they have been moderating. August was the second consecutive month in which core prices rose 0.2 percent, following three months of 0.3 percent inflation. And some prices that have perked up recently will probably abate. For instance, rising clothes prices, which also bolstered core inflation, are mostly a result of the arrival of more expensive fall fashions.
Rents have also played a big role pushing up prices. The National Association of Realtors expects apartment rents in urban complexes to rise 4.8 percent this year, up from 2.9 percent in 2005. The shelter component in the Consumer Price Index, which makes up more than 40 percent of the core, rose 0.2 percent in August, pushed mostly by higher rents.
Some economists argue, however, that rents should moderate eventually, because many condos that were built during the housing boom are now sitting unsold and will probably be converted into rental units.
And the moderating viewpoint is consistent with other data. Industrial production declined by 0.1 percent in August, according to another government report. Slowing output should ease inflation pressures.
“One of the components of inflation has been commodity prices across the board, from energy to metals,” said Thomas J. Duesterberg, president and chief executive of the Manufacturers Alliance/MAPI. “We are starting to see some moderation in these prices. That’s consistent with the moderation of industrial demand.”
The economic outlook could yet become bleaker. People who bought their homes using adjustable-rate mortgages to keep their monthly payments low are starting to see higher mortgage bills. Some are falling behind on their payments.
And many economists suspect that home prices are still likely to fall more steeply. This could decimate residential construction. And it could impair American consumers’ ability to borrow and, therefore, to spend.
“There’s a storm building there,” said Dean Baker, co-director of the Center for Economic Policy Research in Washington.
But if so, it is further away on the horizon. |
