Posted on: Monday, June 21, 2004
Inflation is now top concern
By William Sluis
Chicago Tribune
Expectations that the global economy might overheat, sending interest rates off the charts, were unthinkable as recently as the beginning of this year.
Since then, an unexpected boom in Japan, where growth recently has topped a 6 percent rate, coupled with a Chinese economy that is roaring ahead at breakneck speed, has erased concerns that activity might stall.
As a side effect, oil prices have spurted worldwide. And central bankers, here and elsewhere, are getting nervous about printing truckloads of money. Their next goal: tightening credit.
Get ready for Friday's revision of first-quarter gross domestic product to create no lessening of the din for higher rates. Chicago economist Robert Dederick says growth will push upward to an annual rate of 4.5 percent, from an earlier estimate of 4.4 percent.
"The focus has shifted away from the economic expansion to concerns about inflation, even if it is a bit early," said Dederick, of RGD Economics.
Numbers on price increases have come in stronger than expected for several months, he said, though there are few signs of a rebound in general inflation.
"Central bankers can never relax" in waging war against inflation before it becomes broad-based, Dederick said.
In the meantime, he said, the economic expansion "has become solid and self-sustaining, if not exuberant. Strength is starting to beget additional strength. The economy continues to run at about a 4.5 percent growth rate, and barring any outside shocks, similar expansion should prevail for the balance of this year."
With only 10 days remaining before the Federal Reserve takes action on interest rates, some strident voices are saying policy-makers should boost the short-term lending target by a half-point, lifting it from 1 percent, a 46-year low.
Their reasoning: The current level of rates would be appropriate for a recession, but not for an economy that is booming with few signs of any letup.
Economist Mickey Levy says members of the Fed "must slow nominal spending growth and restrain inflation expectations." Doing so, he said, will require several steps to raise the short-term lending target.
Additionally, Levy, of Bank of America in New York, says policy-makers of the central bank "must avoid public statements suggesting that the inflation outlook is sanguine."
Reports due out include May orders for durable goods on Thursday and the month's new-home sales and sales of existing homes on Thursday and Friday, respectively.
The home-sales numbers bear watching because while construction permits are at record levels, any further kick upward by mortgage rates will threaten all types of real estate. A boom in April home resales was seen by pessimists as a last hurrah for the residential market, as buyers rushed to beat rising mortgage costs.
As the summer doldrums set in, investors in the stock market are focused on second-quarter earnings, which will start flooding in less than three weeks from now. Expectations are high, and any companies that disappoint will receive harsh punishment.
Chicago investment manager William Hummer isn't looking for much bad news, however, when the results roll out.
"At this point, it appears that profits will be up by 14 percent or 15 percent year-over-year, because revenues are being sustained at an encouraging rate," said Hummer, of Wayne Hummer Investments.
