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Consumer prices rise
June 15, 2001: 10:48 a.m. ET

May CPI up 0.4%, per expectations, but core rate up less than forecast
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NEW YORK (CNNfn) - Consumer prices rose in the United States in May, led by swelling energy prices, the Labor Department reported Friday, but analysts said the risk of inflation in the ailing U.S. economy is low.

The CPI, the government's main inflation gauge, rose 0.4 percent in May, the Labor Department reported, after rising 0.3 percent in April.

Analysts polled by expected a 0.4-percent rise.

Excluding often-volatile food and energy prices, the "core" CPI rose 0.1 percent after increasing 0.2 percent in April. Analysts had expected another 0.2-percent rise.

"This is the type of report we would expect to see, given the slowdown that we've already experienced in the economy," said Mark Vitner, economist with First Union Securities in Charlotte, N.C. "Companies don't have any pricing power, and if they don't have any pricing power, then inflation can't really be a threat."

In a separate report, the Federal Reserve said U.S. industrial production fell 0.8 percent, compared with analysts' expectations of a 0.3-percent drop.

The Fed also said factories, mines and utilities ran at 77.4 percent of capacity in May, down from 78.5 percent in April. Economists expected capacity utilization of 78 percent.

Manufacturing still suffering

Industrial output has fallen eight straight months, its longest string of declines since the recession of 1982, and capacity utilization is at its lowest level since August 1983, when the economy was coming out of that recession.

The industrial sector has been hardest hit by the economic slowdown that has gripped the country since the second half of last year. While the national economy has slowed markedly, manufacturing is in a recession and has lost a half-million jobs this year alone.

"These data indicate that the manufacturing sectors of the economy are still reeling from slowing demand and bloated inventories," said Steven Wood, chief economist with FinancialOxygen. "Further declines in output are likely."

The mounting job cuts may finally be having some slight effect on resilient consumer confidence. The University of Michigan said its preliminary consumer sentiment index for June slipped to 91.6 from a revised 92.0 in May, according to a Reuters report.

Still, the reported index was higher than the 91.0 analysts polled by expected.

U.S. Treasury bond prices rose after the CPI report eased trader's fears about inflation, which can erode the value of long-term investments in government bonds.

U.S. stocks were a bit lower in midday trade, recovering slightly from early warnings from telecommunications equipment makers Nortel Networks Inc. (NT: Research, Estimates) and JDS Uniphase Corp. (JDSU: Research, Estimates).

Hopes high for another rate cut

Economists said the CPI and manufacturing data, coming a day after the government's wholesale price report came out better than expected, would encourage the Federal Reserve's campaign to cut interest rates and boost the ailing U.S. economy.

"There's no inflation," David Blitzer, chief economist at Standard & Poor's, told CNNfn's Before Hours program. He said that between this morning's report on industrial production and a wave of corporate results warnings, "We're going to hear more and more talk" about a half-percentage point interest-rate cut. (143K WAV) or (143K AIF)

The Fed has cut rates five times this year, taking its key rate to 4 percent from 6.5 percent, and some economists have worried that the flood of money into the economy could lead to inflation. The Fed has said it's not worried about inflation yet.

"Businesses are simply not able to pass any additional costs through to final consumers," said Carol Stone, economist at Nomura Securities International in New York. "They were bargain hunters in good times, and now they're really bargain hunters. This says there is room for the Fed to do whatever it needs to do to maintain growth."

Energy costs skyrocket

In the CPI report, energy costs soared 3.1 percent, with electricity costs jumping 1.3 percent and gasoline prices skyrocketing 6 percent. Food prices rose 0.3 percent.

Within the core CPI, the main component that rose rather strongly was housing, which was up 0.4 percent in May. But apparel costs tumbled 0.9 percent and tobacco prices fell 1.3 percent.

Medical care prices increased 0.3 percent. Prices of new cars fell 0.1 percent, but airline fares jumped 0.8 percent.

"These data indicate that inflationary pressures are largely confined to the energy sector of the economy," FinancialOxygen's Wood said. "Moreover, because inflation is a lagging indicator of overall economic activity, the recent sharp slowing of [economic] growth should dampen inflation over the balance of the year." graphic

-- from staff and wire reports


PPI gains in May, but less than expected - June 14, 2001

CPI, housing starts creep up - May 16, 2001

Fed cuts interest rates for fifth time in 2001 - May 15, 2001

U.S. production, capacity, inventories shrink - May 14, 2001


CPI report

Industrial production report

Federal Reserve

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