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U.S. Inflation Soars to Highest Monthly Rate in Nine Years, Output Rises
By Vincent Del Giudice and Vince Golle
U.S. Economy: Inflation at 9-Year High, Production Up (Update3)
(Closes markets.)
Washington, May 14 (Bloomberg) -- Consumer prices rose at
the fastest monthly rate in nine years and manufacturing surged
in April, government reports showed today. Stocks and bonds
plunged on concerns that inflation and interest rates are headed
higher.
The consumer price index, which measures the cost of goods
and services, rose 0.7 percent last month as gasoline prices
soared by a record amount and the cost of almost everything else
from apparel to air fares to tobacco increased, Labor Department
figures showed. The CPI rose 0.2 percent a month earlier.
Output at factories, mines and utilities rose 0.6 percent
last month after rising 0.5 percent in March, the Federal Reserve
said. It was the largest increase since last August, when General
Motors Corp. , the world's largest automaker, resumed production
after a strike.
''We've had a spectacular performance in overall growth,''
said David Jones, chief economist at Aubrey G. Lanston & Co. in
New York. ''The bad news is we may be on the verge of
accelerating cost and price pressures. That's why the Fed has to
be on guard.''
The Fed report showed that auto and truck production
increased 2.9 percent in April, and more gains may be coming.
GM said on May 6 it was boosting production for the second
time in a month. It will build 1.7 percent more cars and trucks
than planned during the second quarter to meet increased U.S.
demand. Ford Motor Co. also boosted its second-quarter production
last month by 20,000 trucks and 10,000 cars.
Inventories, Sales Rise
Another report showed that inventories of goods at U.S.
businesses rose a larger-than-expected 0.5 percent in March to
$1.096 trillion as companies added stocks to keep up with a 1.1
percent increase in sales. Analysts expected March inventories to
rise 0.2 percent.
Small wage gains and April's jump in consumer prices
combined to push down the real, inflation-adjusted earnings of
U.S. workers by 0.2 percent in April, another Labor Department
report showed. It was the third decline this year, which fell 0.5
percent in March.
The reports delivered a jolt to investors and heightened
concerns that the Fed may need to raise overnight borrowing costs
to slow an economy that looks to be gaining speed in its ninth
year of expansion.
The Dow Jones Industrial Average fell 194 points, or 1.8
percent, to close at 10913 and the benchmark 30-year Treasury
bond slumped more than two points, pushing up its yield 16 basis
points to 5.91 percent, its biggest one-day decline since July
1996.
Fed Fund Futures
In a Bloomberg survey of 28 primary dealers -- the firms
that deal directly with the Fed's securities trading desk -- all
predicted the Fed will leave the overnight rate unchanged at a
policy meeting next Tuesday. Still, 14 expect the Fed to announce
that it has adopted a bias toward raising the rate at some point
in the future.
The November federal funds futures contract rose above 5
percent today, indicating investors are expecting a quarter
percentage-point increase by then in the overnight bank lending
rate. The Fed's target for federal funds is 4.75 percent, where
it's been since late last year.
Even so, analysts said the inflation scare could be
overdone. Don Hilber, an economist with Wells Fargo Co. in
Minneapolis, is forecasting that the CPI's core rate, which
excludes food and energy prices, will rise no more than 2.5
percent this year -- little changed from last year's 2.4 percent
increase.
''The lack of bottlenecks in the supply chain, the absence
of any sustained rise in commodity prices, the deceleration of
wage growth and big productivity increases all trump April's 0.7
percent CPI increase,'' said Ken Mayland, an economist at KeyCorp
in Cleveland. ''The Fed shouldn't and probably won't shift policy
on May 18'' when policy-makers next meet to set interest rates.
Core Rate Rises
Today's inflation report showed that the CPI's core rate
rose a larger-than-expected 0.4 percent in April after a 0.1
percent rise a month earlier. Before the report, analysts
expected a 0.4 percent rise in the CPI and a 0.2 percent increase
in the core rate.
Energy prices, which account for almost a tenth of the
index, rose 6.1 percent last month, as prices at the gas pump
rose 15 percent -- the biggest increase on record.
Food prices, which account for almost a fifth of the index,
rose 0.1 percent in April after a 0.2 percent decrease in March.
Housing costs, which make up two-fifths of the CPI,
increased 0.4 percent last month. Medical care costs rose 0.4
percent, led by a 0.8 rise in the cost of prescription drugs.
Prices of personal computers fell 1.4 percent in April after a
3.5 percent drop the previous month.
Higher Air Fares
Airline fares rose 2 percent last month and new vehicle
prices rose 0.1 percent. Apparel costs rose 1.5 percent, the
largest increase since a 1.5 percent gain in March 1990.
Energy prices have accelerated after world oil producers
agreed to cut crude oil output by about 2.7 percent in an effort
to boost prices. Also, gasoline prices have been rising because
of refinery problems in California during March and April.
Prices in two other areas, tobacco and clothing, were one-
time occurrences to make up for early cuts, and have ''nothing at
all to tell us about the underlying inflation environment,'' said
Ian Shepherdson, chief U.S. economist at High Frequency Economics
Inc. in New York.
Tobacco prices rose 3.6 percent in April after a 3.5 percent
decline a month earlier as discounting programs by tobacco
companies expired.
RJR Nabisco Holdings Corp., the No. 2 U.S. cigarette maker,
was offering a 55-cent-a-pack discount on their major brands -- a
move aimed at keeping smokers after prices were raised by 70
cents last year to pay for the industry's $206 billion legal
settlement with states. ''Prices are now settling back down
closer to the level the tobacco companies intended,'' Shepherdson
said.
Paying Full Price
Apparel costs rose 1.5 percent, the largest since a 1.5
percent gain in March 1990. That rise follows price cuts earlier
in the year as clothing stores try to sell off excess
inventories, Shepherdson said. ''That process is over but prices
are still 1.5 percent lower than last August,'' he said.
Retailers said consumers are also less likely to insist on
discounts. ''What we saw this year, perhaps more than in the
recent past, is that people came in to buy markdown merchandise
and ended up veering off into full-price merchandise,'' said
Margery Myers, a spokeswoman for Talbots Inc., a women's career
clothing retailer based in Hingham, Massachusetts.
The costs of new computers fell 1.4 percent in April, after
a 3.5 percent decline a month earlier. Computer prices may keep
getting cheaper, too. Intel Corp., the No. 1 maker of computer
chips, is expected to cut Pentium II and Pentium III prices as
much as 34 percent next week to help speed the shift to the
Pentium III, analysts said. Intel, based in Santa Clara,
California, wants more users to buy the new Pentium III chips,
which have added graphics features and run at higher speeds.
Plant-Use Rate Rises
The Fed's industrial production report showed that
manufacturing output advanced 0.6 percent during April after
rising a revised 0.4 percent in March. Mining output rose 0.1
percent last month and output at utilities increased 0.7 percent.
The plant-use rate, which measures industrial capacity in
use, rose to 80.6 percent in April from 80.4 percent during
March, the Fed said. That's the highest reading since last
December's 80.7 percent.
Factory orders and shipments have shown signs of strength
since the start of the year, helped by the strong domestic
economy and a recovery overseas.
Though factories keep cutting workers -- 407,000 over the
past year -- the number of factory hours worked increased in
April after three consecutive declines, another sign of a
turnaround, according to Peter Kretzmer, an economist at
NationsBanc Montgomery Securities in New York.
Moreover, the National Association of Purchasing
Management's manufacturing index has climbed above 50 for the
past three months, a sign the industrial economy is expanding
after eight straight months of contraction.
Capital Spending
Manufacturers have made major investments in factories,
computers and other equipment to improve productivity. Business
investment has risen for seven years in a row, the longest such
stretch since the government began keeping records on capital
spending in 1929.
Earlier this week, Labor Department figures showed non-farm
productivity rose at a 4 percent annual rate during the first
three months of the year after rising at a 4.3 percent rate in
the fourth quarter -- the best back-to-back showing since 1983.
Manufacturing productivity, alone, rose at a 5.8 percent
rate in the first quarter. Gains in productivity are crucial to
businesses if they want to absorb rising labor costs and hold
down the prices they charge to stay competitive.
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