Tags: Consumer | Prices | Rise | March

Consumer Prices Rise in March

Wednesday, 19 April 2006 12:00 AM

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Will the Federal Reserve finally end its string of consecutive interest rate hikes?

Some analysts think so, especially after rising energy costs helped to boost consumer prices by .04% in March, as measured by the U.S. Labor Department's Consumer Price Index report for March.

"The overall increase in the Labor Department's consumer price index for March matched expectations on Wall Street, but a 0.3% rise in prices excluding food and energy was a bit swifter than forecast," reported Reuters upon today's release of the CPI numbers.

With oil inching up toward $80 a barrel and an unexpected hike in apparel and housing costs, some analysts say that the Fed will pull back on further rate hikes.

Apparel prices, which declined by 1% in February, rose 1% higher in March. Home and shelter costs - which comprise 33% of the overall CPI - increased by 0.4% for a second month in a row.

The Labor Department report could signal that skyrocketing energy prices are having a far-reaching impact on broader consumer costs. And that should get the attention of Federal Reserve officials.

On Tuesday, the Fed released the minutes of meeting held in late March. They hinted that the Fed is getting close to the end of nearly two years of steady interest rate hikes. Stocks and bonds rallied on the news yesterday.

Read on to find out more about what the Fed had to say.

Reading and analyzing the minutes from the Federal Open Market Committee's meetings in late March is a bit like divining tealeaves or using a Ouija board.

But at least the record is clear on one issue - Fed officials seem uniformly upbeat regarding the health of the American economy.

"The information reviewed at this meeting suggested that economic activity was expanding strongly in the first quarter," read the Fed minutes.

"Consumer spending was on track to rise at a robust pace, and business purchases of equipment and software picked up appreciably. Warm weather boosted housing construction in January and February, although sales of new homes dropped back and house prices decelerated slightly.

"Private payrolls advanced solidly in the first two months of the year. Headline consumer price inflation jumped in January but moderated in February as energy prices moved down. Core inflation remained contained."

The minutes also showed that labor demand continued to increase during the first two months of 2006 - as private non-farm payroll employment demonstrated large gains in both January and February - and favorable weather conditions helped employment growth in the construction sector.

Also, "the unemployment rate continued to decline and averaged 4¾ percent over the first two months of the year," the minutes said. "Several other labor market indicators also signaled a further tightening of labor market conditions."

As far as the Labor Department's report on consumer prices, the Fed didn't seem too surprised at the rise in the CPI.

"Readings on core consumer price inflation were favorable in recent months," they said. "Nonetheless, the overall consumer price index edged up in February after registering a large increase in January that was driven mostly by a spike in energy prices. While prices of food and core items recorded only modest increases in February, energy prices fell back amid increases in oil inventories and unseasonably mild temperatures since the latter part of December.

"Weekly data for March, however, indicated that gasoline prices rose sharply," the Fed reported.

"Prices of capital equipment inched up in February after a more substantial gain in January. Nevertheless, prices of capital equipment decelerated over the past twelve months. Higher energy prices still seemed to be passing through to the prices of a number of core intermediate materials, although such increases were more moderate than those observed in the immediate aftermath of the hurricanes last autumn."

It was two paragraphs in particular that got traders' attention. They seemed to imply that the continued rise in interest rates may be nearing an end.

"At its January meeting, the Federal Open Market Committee decided to raise the target level of the federal funds rate 25 basis points, to 4½ percent.

"In its accompanying statement, the Committee indicated that, although recent economic data had been uneven, the expansion in economic activity appeared solid. Core inflation had stayed relatively low in recent months, and longer-term inflation expectations had remained contained," said the report.

"Nevertheless, the Committee noted that possible increases in resource utilization as well as elevated energy prices had the potential to add to inflation pressures. In these circumstances, the Committee judged that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance but reiterated that it would respond to changes in economic prospects as needed to foster its objectives."

"In the Committee's discussion of monetary policy for the inter-meeting period, all members favored raising the target federal funds rate 25 basis points to 4¾ percent at this meeting.

"The economy seemed to be on track to grow near a sustainable pace, with core inflation remaining close to recent readings against a backdrop of financial conditions embodying an expectation of some tightening. Since the available indicators showed that the economy could well be producing in the neighborhood of its sustainable potential and that aggregate demand remained strong, keeping rates unchanged would run an unacceptable risk of rising inflation," according to the minutes.

"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy. However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation."

While the FOMC minutes imply that the Fed is done raising rates for a while, a letter from Chairman Ben Bernanke to Rep. J. Gresham Barrett (R- S.C.) suggests that the Fed chief may not see it that way.

In the correspondence, which was excerpted by Bloomberg yesterday, Bernanke tells Barrett that higher energy costs won't stoke price increases in other goods over the long run if the Federal Reserve can keep inflation expectations in check through interest-rate moves.

"In the longer run, these inflation effects should fade even if energy prices remain elevated, so long as monetary policy keeps inflation expectations well-anchored by responding appropriately to future price and output developments," writes Bernanke.

Bloomberg notes that in the past, the Fed has insisted that stable prices are a "prerequisite" to achieving high employment and moderate interest rates.

"In Bernanke's first meeting as chairman last month, the Fed raised the benchmark U.S. rate for a 15th straight time and said more increases 'may be needed' to contain inflation," the news service reported.

But rising energy prices threaten the economic landscape.

Bernanke writes: "The rise in energy costs has had a significant impact on overall or `headline' inflation and has likely also affected core inflation, which excludes fuel prices."

Bernanke tells Barrett that energy costs "have probably reduced" U.S. economic growth by 0.5% to 1% per year since late 2003.

According to Bloomberg, the letter to Barrett is one in a series of responses to lawmakers who requested additional comments from Bernanke after he testified before House and Senate committees this past February.

As previously reported in MoneyNews, for some time now, commodities have been soaring, as oil, metals, foodstuffs and countless other holdings continue to notch record gains.

Renowned commodities analyst and investor Jim Rogers insists that there is no end in sight to the record-breaking commodity bull we are seeing today, and he predicts that gold will eventually hit $1,000 an ounce, while global thirst for energy and raw materials will only grow, sending other commodities higher as well.

"The shortest bull market for commodities lasted 15 years, the longest 23 years," Rogers, 63, said in an interview, according to Bloomberg News. "So if history is any guide, 'they've got a long way to go.' "

Many hedge funds and individual speculators have been shunning traditional stocks and bonds in hopes of gleaning comparatively spectacular returns from oil, gold, zinc and copper and other surging commodities. Global demand for these materials is through the roof, and suppliers are having trouble keeping up.

"Supply and demand is terribly out of balance for nearly all commodities right now," Rogers said in Singapore on Monday, according to the news service. "This is not a bubble."

Other analysts agree that a dearth of new investment in commodity discovery will only send prices higher. Rogers notes that it has been some 35 years since the unearthing of a new major oilfield, and no new mines have been opened anywhere in the world for some time.

But while the popularity of commodities surges, Bloomberg writer David Pauly warns that commodity prices may be skewed by speculation.

Pauly writes: "While global economic growth has increased demand for commodities - eroding inventories of copper and sugar - speculators have pushed prices well beyond what would be set through normal negotiations between producers and customers."

He understands why investors are flocking to commodities: The Goldman Sachs Commodity Index has risen 13% year-to-date, compared to the S&P 500, which has gained a relatively low 4.8% for the same period. "And in the same time, U.S. Treasury 10-year securities have declined, the yield rising to 4.98% from 4.39%," Pauly writes.

But investors may be letting greed cloud their better judgment as they ignore a potential commodity price collapse, he says.

"Speculators have forgotten, if they ever knew, that commodities are notoriously volatile. It's simple. When prices soar, miners mine more, factories make more and farmers plant more. Soon supply outruns demand and prices drop, often disastrously."

And while at the moment, emerging nations are desperate for energy, "what if simultaneously extraordinary economic growth rates in China and India slow to just above-average?" Pauly asks.

"That would reduce demand for energy just at a time when, as analysts for Paris-based Societe Generale SA pointed out last week, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries rev up crude oil production."

With fuel prices in the stratosphere and a slowdown in homebuilding, there is a solid argument that commodities could suddenly take a dive, Pauly argues.


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(Headlines - scroll down for full stories) Will the Federal Reserve finally end its string of consecutive interest rate hikes? Some analysts think so, especially after rising energy costs helped to boost consumer prices by .04% in March, as measured by the U.S. Labor...
Wednesday, 19 April 2006 12:00 AM
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