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CPI unchanged in May
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June 16, 1999: 8:46 a.m. ET
Core rate up modest 0.1%; will Fed move as far, as fast?
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NEW YORK (CNNfn) - Consumer prices were flat in May, the government said Wednesday, a sign of benign inflation that cheered Wall Street -- especially after April's jump in retail prices sparked fears the Federal Reserve would raise interest rates soon in a bid to cool the economy.
The stock and bond markets rallied after the Labor Department said the consumer price index, the government's main inflation gauge, was unchanged last month after rising 0.7 percent in April -- the biggest increase in more than eight years. The latest report came in below economists' forecasts for a 0.2 percent rise, according to Reuters.
The so-called core rate of inflation, excluding volatile food and energy prices, edged up 0.1 percent, compared with forecasts of a 0.2 percent increase and April's 0.4 percent rise.
Fed rate rise less of a sure thing
Analysts said the report may convince the Fed to delay any interest rate rise, and spur the central bank to raise short-term rates less aggressively than it might have otherwise.
"It was a great number, no question about it," Joel Kent, economist at Lehman Bros., told Reuters. "The worst-case scenario (now) is that the Fed only goes once. Going into this number, people thought the Fed would have to go three times. Now they can move slowly."
Separately, the government reported that housing starts rose in May while industrial production edged higher.
Retail prices were flat in May after jumping in April
The consumer price report is always closely watched on Wall Street, but was being billed in recent weeks as a harbinger of the Fed's next move on rates. Days after April's CPI report, the Fed changed its stance from neutral to leaning toward raising interest rates.
A move to raise rates would come after the Fed cut short-term rates three times late last year to insulate the United States from economic turmoil overseas. But parts of Europe and Asia are showing signs of recovery and growth in the United States continues at a rapid clip.
"This does put the Federal Reserve in a bit of a bind," Mitch Stapley, chief fixed income officer at Kent Funds, told Reuters. "Can the Fed tighten now that we see inflation is not going to be a problem? When Alan Greenspan testifies before Congress tomorrow (Thursday), maybe we'll know."
Investors cheer inflation data
Wall Street greeted the report with a huge sigh of relief. The Dow Jones industrial average jumped 163 points to 10,758 at midday while the 30-year Treasury rose 25/32, or $7.81 on a $1,000 bond, lowering its yield to 6.05 percent from 6.11 percent Tuesday.
Analysts who argued that April's jump in the CPI was due to one-time factors, such as a spike in oil and tobacco prices, took particular comfort in Wednesday's data. But others said the numbers were unlikely to stop the Fed from raising rates altogether.
Ash Rajan, market analyst at Prudential Securities, told CNNfn he expects Fed policy-makers to raise rates a quarter-point when they meet at the end of the month. "We need the flu shot," he said of the expected rate rise. "We need the vaccine."
That's because the economy has not slowed much, which could start forcing prices and wages sharply higher, especially with unemployment at its lowest level in 29 years. In addition to slowing growth, higher rates can also dent corporate profits and so are worrisome for investors.
Clothing, energy prices lead drop
In its report, the Labor Department said prices for energy, clothing, tobacco and airline tickets fell. Energy costs tumbled 1.3 percent.
Separately, the Commerce Department said housing starts rose 6.3 percent last month to a seasonally adjusted annual rate of 1.68 million units. Analysts had predicted a smaller increase after April's 9.7 percent decline. Gains in building activity came in all regions of the country.
And the Fed reported that industrial production rose for the fourth straight month in May, edging up 0.2 percent, slightly below the 0.3 percent gain forecasts by economists.
All eyes on Wall Street will now be on Fed Chairman Alan Greenspan, who is to testify before Congress Thursday morning.
"This will certainly heat up the debate at the central bank," Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio, told Reuters news agency.
"It absolutely makes tomorrow's (Thursday's) Greenspan announcement as widely anticipated as the new 'Star Wars' movie."
-- from staff and wire reports
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