NEW YORK (CNN/Money) -
Continuing its comeback from a long hiatus, inflation reared its ugly head again Thursday, further cementing the likelihood that a Fed interest-rate hike is on the way.
The Commerce Department's price index for U.S. consumer spending (PCE), part of its quarterly gross domestic product (GDP) report, jumped 3.2 percent in the first quarter, the department said Thursday, the biggest gain since the first quarter of 2001.
Excluding food and energy prices -- something economists can do, even if you can't -- the index rose 2 percent, the biggest jump since the fourth quarter of 2001.
"This is evidence of what many have said they've personally experienced," said Anthony Crescenzi, bond market strategist at Miller Tabak & Co. "Many people can relate to the idea that the inflation rate has accelerated, when they take trips to gas station or buy food or health care -- so many products and services."
Of course, Crescenzi and other economists cautioned against panicking over one number, but the report reinforced the message of several recent indicators:
- The Bureau of Labor Statistics' core consumer price index (CPI) posted healthy gains in the first three months of the year; March's gain was the biggest since November 2001.
- Fed Chairman Alan Greenspan last week said he was no longer worried about "deflation," in which prices fall uncontrollably.
- Commodity prices, as measured by the CRB index, have risen some 17 percent in the past year (though the gains have tapered off in the past month.)
| Related stories
|
|
|
|
|
On Wall Street, stock and bond prices were mostly lower in afternoon trading.
At first, traders seemed to take the weakness in the headline GDP number as a sign that the Fed might have mercy and hold off from raising interest rates. Later in the day, however, fears about higher rates gained greater influence.
Fat chance
Many economists now think that, when Fed policy makers meet next Tuesday to discuss their target for a key overnight lending rate and hammer out their three-paragraph diagnosis of the economy's health -- a document traders and economists study with rabid interest -- they will likely change their language to say, for the first time since May 2003, that "an unwelcome fall in inflation" is no longer the dominant risk to the economy.
"I would say the consensus is that the Fed goes to a neutral position on inflation," said John Silvia, chief economist at Wachovia Securities.
Most economists -- probably including a number of Fed policy makers -- doubt inflation is exactly soaring. Factories are still using a low percentage of their total capacity. Wage growth is still slow. Unemployment likely remains well above its optimal rate -- somewhere in the neighborhood of 4 percent, Greenspan believes.
Until all this "slack" in the economy is taken up, inflation will not be that bad -- no need to dig out your old "Whip Inflation Now" button.
In fact, until wages rise and productivity falls, the Fed may be content to sit where it is for a while. Productivity measures how much companies can milk from each worker each hour.
After cutting its target for the fed funds overnight bank lending rate 13 times between 2001 and 2003 to fight the effects of a recession, terror attacks and two wars, the Fed has kept that target at the lowest level in more than 40 years and has promised to be "patient" in raising it.
"There is no reason for the Fed to deviate away from the cautious policy approach," said Sung Won Sohn, chief economist at Wells Fargo & Co. "The central bank won't raise the interest rate until August or later."
Still, scary numbers like Thursday's PCE index cannot be ignored, since inflation fears can become self-fulfilling prophecies.
"Expectations are one of the biggest parts of the inflation process," said Crescenzi of Miller Tabak.
"For so long, an individual who owned a small business or had influence over pricing somehow, would say, 'Prices aren't rising, so we can't raise prices, either.' Now they can see, with this data and through anecdotal evidence, that others are raising prices, and they may feel they can raise their prices now."
What's more, a separate report Thursday from the Bureau of Labor Statistics showed a bigger-than-expected jump in employment costs in March. That gain was not driven by wage growth, which continues to be sluggish, but by higher benefit costs.
If these trends continue, that would be bad news for just about everybody -- inflation would rise, wage growth would barely keep up and benefit costs would hurt corporate profits.
"Workers feel underpaid, while the company feels labor's too expensive, so we still get outsourcing abroad," said Silvia of Wachovia Securities. "This is one of those issues where no one's happy."
|
