Posted on: Wednesday, June 16, 2004
Fed downplays inflation
By Jeannine Aversa
Associated Press
WASHINGTON — Consumer prices advanced in May at the fastest pace in more than three years, as rapidly increasing food and fuel costs forced Americans to dig deeper into their pockets.
But even with the pickup, Federal Reserve Chairman Alan Greenspan said yesterday he and the central bank's other decision-makers aren't worried that the country is on the brink of an unwanted surge in inflation. Any interest rate increases by the Fed would be at a measured pace unless economic conditions change, he said.
The Consumer Price Index, the government's most closely watched inflation barometer, rose 0.6 percent last month, the largest increase since January 2001 and up from a 0.2 percent rise in April, the Labor Department reported.
However, the "core" rate of inflation, which excludes volatile food and energy prices, increased by only 0.2 percent in May, down from a 0.3 percent rise the month before. From an economic point of view, that suggested prices of other goods and services were more subdued — an encouraging sign that inflation is not a danger to the economy, analysts said.
Nonetheless, the latest snapshot of the nation's inflation climate would justify a move by the Federal Reserve to raise interest rates for the first time in four years when it meets later this month, economists said.
Carl Bonham, executive director of the University of Hawai'i Economic Research Organization, said yesterday that there aren't any "silver linings" to inflation and that rising consumer prices would slow the economy to a certain extent. He said the rising price of oil and gasoline diverts money that consumers would normally spend elsewhere.
The latest Economic Research Organization study predicts the annual rate of inflation will be 3.2 percent in Hawai'i in 2004. That would be the highest rate the Islands have seen in a decade. Bonham said a surge in prices in Hawai'i during the last half of 2003 prompted the forecast.
Some companies are finding it easier to raise prices now that the economy is strengthening — something they found hard to do during the slump.
Appearing at a Senate hearing on his nomination to a fifth term as Fed chief, Greenspan said he and his colleagues still hold the view that "inflationary pressures are not likely to be a serious concern in the period ahead" and they probably can raise interest rates gradually to head off inflation. If their forecasts, however, turn out to be wrong, Greenspan again suggested as he did last week that more aggressive action could be taken.
Economists widely expect the Fed to raise short-term interest rates on June 30 from a 46-year low of 1 percent, for the first time in four years — now that the economic recovery is firmly rooted. Most economists are forecasting 0.25 percentage increase.
President Bush, meanwhile, said of the economy's performance: "We've overcome a lot. Not only are we strong today, we are getting stronger."
A recent Associated Press poll conducted by Ipsos-Public Affairs shows a slight improvement in Bush's economic ratings. About 47 percent of the respondents said they approve of his performance on the economy, up from 43 percent.
In June 1996, President Clinton wasn't doing much better during his re-election bid, with an economic approval rating in the high 40s to low 50s.
For the first five months of this year, consumer prices rose at a seasonally adjusted annual rate of 5.1 percent, exceeding the 1.9 percent increase for all of last year. Core prices increased at a rate of 2.9 percent, compared with a 1.1 percent advance registered for 2003.
Still, by historical standards, the rate of inflation is still considered relatively low.
In May, energy prices propelled the advance in the overall CPI, rising 4.6 percent, the largest gain since January and up from a 0.1 percent rise in April. Gasoline prices last month shot up 8.1 percent.
Food prices in May jumped 0.9 percent, the biggest increase since January 1990, and up from a 0.2 percent rise in April. Analysts said more expensive transportation costs due to higher fuel prices were a factor in the increase.
The price of crude oil, which peaked at around $42 a barrel in late May, is expected to ease later this year. That should help gasoline prices as well as food prices settle down in the coming months, analysts said.
"I think the worst is over," said Mark Zandi, chief economist at Economy.com. Advertiser staff writer Peter Boylan contributed the Hawai'i portion of this report.
Analysts don't believe that inflation threatens the recovery yet, but the upward pressure marks a big change in the pricing climate from a year ago. The Fed then was worried about the prospects of deflation, which is a prolonged and widespread price decline.
