Inflation lags, but rates will rise
By William Sluis
Chicago Tribune
The inflation drumbeat that resounded through the economy in the spring and early summer has slowed as the price of gasoline sinks, at least slightly, and farmers await a harvest of bumper crops.
It was energy and food that stirred most of the fears of price pressures, as costs for manufactured goods languished.
Even if it has slowed, inflation still has an intractable foe. Until he is convinced it is beaten and in retreat, Federal Reserve Chairman Alan Greenspan will remain committed to boosting interest rates.
The central bank chief is on deck tomorrow in scheduled testimony about the economy before members of the House Budget Committee. At the same time, the Fed will issue its beige book of regional economic activity.
Chicago economist William Hummer says that if Greenspan doesn't shun talking about the economy, he will say the recovery is proceeding but subdued.
"A rebound is under way from the second-quarter slump, but it is somewhat modest," said Hummer, of Wayne Hummer Investments. Last quarter's growth rate of 2.8 percent "was truly dreary, but the expansion has improved to about a 3.7 percent rate," he said.
Areas of vitality include consumer spending and home construction, but some other sectors of the economy are lagging, he said.
"At this point, the Fed really isn't feeling much pressure from inflation," Hummer said. "Even so, it is likely that members of the central bank will boost interest rates by a quarter point, to 1.75 percent, when they meet Sept. 21."
It would be the third upward push on rates since the Fed began a monetary tightening campaign at the end of June.
The dollar got a boost in world currency markets late last week as August payrolls grew by 144,000 positions — about what economists were expecting.
Analysts said the new jobs are evidence the economy is picking up steam.
The next hurdle for the greenback comes Friday, with the trade deficit for July. Over the course of a year, the yawning shortfall is approaching $500 billion, hardly a booster for confidence in the U.S. currency.
Economists are hoping for a modest narrowing of about $4 billion from June, when the trade gap ballooned sharply to a record $55.8 billion. The month showed weakness in exports, which sank 4.3 percent, as imports advanced 3.3 percent.
Also Friday, the Labor Department reports its August producer price index, or wholesale inflation. Thanks to a 1.6 percent drop in food prices, the July number showed a modest uptick of only 0.1 percent, following a 0.3 percent decline a month earlier.
With summer's final holiday weekend over, traders in the stock market are hoping the onset of September will break through a malaise that has seen prices rise only about 1 percent since Memorial Day.
However, Bannockburn, Ill.-based mutual fund manager Henry Van der Eb believes it is a dangerous time to make bets on stocks.
"Every day we hear that the soft spot in the economy is over, but it is lasting a lot longer than most people expected. In fact, the economy is at stall speed. Further, the situation is global, extending to Europe and Asia," said Van der Eb, of the Gabelli Mathers Fund.
With few signs of any fresh monetary or fiscal stimulus, Van der Eb says subpar growth could continue for months.
His bottom line: "The soft patch appears to be the beginning of a slow grind for the economy — and that means investors must be cautious."
