Posted on: Monday, June 7, 2004
Inflation anxieties rise with oil price
| • | Gasoline prices boost sales of hybrid cars |
| • | Gas guzzlers still prevail |
| • | World's airlines may lose $3 billion on higher oil prices |
By William Sluis
Chicago Tribune
While periods of inflation in recent years have tended to be relatively mild and short, one element in the price mix is volatile and inspires fear.
Petroleum, the magic elixir that runs factories, powers locomotives, sends airplanes aloft and zooms cars down the highways, is a wild card.
When its price pushes off the charts, topping $42 a barrel as it did last week, predictions that inflation will remain under control lose credibility.
That brings us to Friday's report of the May producer price index. Chicago economist Brian Wesbury is looking for a whopping gain of 0.9 percent, much of it blamed on energy.
The cost of oil rose by about 10 percent last month, roughly $4 a barrel, Wesbury said, and other costs are rising, too. When food and energy are excluded, he anticipates a wholesale price gain for the month of 0.4 percent.
"Commodities are going up steeply, and the carmakers have trimmed the discounts they are offering on cars and light trucks," said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm. "Pricing power is starting to return for corporations."
Numerous measures of inflation, including those for manufacturing costs and for raw materials, "are all at considerable heights," according to Wesbury. Meanwhile, hiring has picked up.
The result, he said, is that pressure to increase interest rates is building on the Federal Reserve, "and it is no longer a question of whether policy-makers will raise rates, but by how much."
Speaking of the Fed, barely more than three weeks remain before members of its Open Market Committee meet to discuss monetary policy.
Chicago investment manager William Hummer says financial markets are well prepared for the central bank to boost its short-term lending target. When the meeting ends June 30 he sees the rate going up by a quarter-point, to 1.25 percent, lifting it from a 45-year low.
"Members of the Fed have done a very good job of communicating the need for a modest move higher," said Hummer, of Wayne Hummer Investments.
For now, the central bankers don't need to be in a rush to go further, he added.
"Labor productivity remains very high, and expectations of future inflation remain quite low," Hummer said. "Even so, it is likely that short-term rates will be pushed upward by three-quarters of a percent by year-end."
The dollar has been sent skidding against rival global currencies, in part because of the abnormally low interest rates. In theory, a stumble by the greenback is supposed to raise the price Americans pay for foreign-made cars and TVs, reducing the trade deficit.
Instead, the recovering economy on this side of the ocean has sent yet another flood of imports stateside from Asia and elsewhere.
Watch for Friday's report of the trade chasm for April to show another near-record, in the range of $44 billion. Unfortunately, anything above $40 billion will do little to stem the dollar's swoon, which shows few signs of abating.
The stock market has been unable to gain traction, as Wall Street fights the oil slick created by Middle East terrorism and tensions.
Chicago investment manager Doug Nardi says the market is suffering from the influence of the three bears — Iraq with its effect on petroleum, the upcoming elections and fears about interest rates.
"One bear, interest rates, has gone to sleep, because no one is talking about hyperinflation," said Nardi, of Scudder Private Investment Counsel.
Of the other two bears, the elections will soon be history. That leaves Iraq, which may remain virulent.
"Once two of the bears are asleep, the market should be able to advance about 10 percent between now and the end of the year," Nardi said. "Corporate profits continue to grow quite favorably, which makes stocks more attractive."
