Scant Price Hikes Cool Inflation Worries
For the last several months, consumers have been snapping up new cars, furniture, airline tickets and all sorts of other items. But despite the spending spree and an overall strong economy, the prices Americans pay still aren’t rising very much.
The latest evidence of that came Tuesday when the Labor Department reported that consumer prices rose just 0.1% last month, unexpectedly good news that triggered a surge in stock and bond prices that mirrored Friday’s big sell-off following other less-favorable reports.
The Dow Jones industrial average rose 135.26 points, or 2.1%, to close at 6,587.16. The gain pushed the average slightly back into positive territory for the year, but it was still off 7% from its record high of 7,085.16 last month.
U.S. bonds surged too, posting their biggest rally in two months. The yield of the benchmark 30-year U.S. Treasury bond dropped to 7.09% from 7.17% on Monday.
A flow of strong earnings reports from major corporations for the first three months of the year also contributed to the stock market’s gains both Tuesday and Monday, when the Dow rose 60.21 points, analysts said.
The back-to-back increases underscored the market’s high volatility. On Friday, the Dow plunged 148.36 points after reports that retail sales were running higher than thought and producer prices for finished goods rose 0.4% last month. But the producer price increases were concentrated in a few areas, and neither they nor the strength in retail sales have had much impact on consumer prices, as Tuesday’s relatively benign report showed.
The Labor Department report showed energy and apparel prices falling last month, food and beverage and housing costs unchanged and prices of only a few items, such as used cars, tobacco products and prescription drugs, rising noticeably. Despite reimposition of a 10% tax on domestic airline ticket charges, fares rose only 4.5% as competitive pressures kept airlines from passing the full amount on to their customers.
Over the last 12 months, the consumer price index increased 2.8%. The so-called core CPI, which excludes volatile food and energy prices, rose 0.2% last month and just 2.5% over the last 12 months. The latter figure, the same as that for the 12 months ended in February, hasn’t been so low since 1966.
The broad nature of the good inflation news caused a few analysts to question whether it is still likely that the Federal Reserve Board will raise short-term interest rates again at its next policymaking session in May. Concerns that overly rapid economic growth would cause inflation to rise late this year caused the Fed to raise short-term rates by a quarter of a percentage point last month.
However, other economists said the CPI report probably would not have a large impact on the central bank’s policy decision, since the Fed said last month that its concern was not current inflation problems but future ones.
“Though inflation remains muted, the Fed is now focused on the ‘persisting strength of demand,’ so we expect it to tighten policy again at the May 20 . . . meeting,” said Bruce Steinberg of Merrill Lynch & Co. in New York.
In a separate report Tuesday, the Labor Department said U.S. workers’ average weekly earnings rose just 0.1% last month, after posting a revised 2.3% rise in February and a 1.8% drop in January. The numbers, which are adjusted for inflation and seasonal variations, suggest there’s still little evidence of a rapid buildup in labor costs, as some U.S. central bankers fear.
Also, the Commerce Department said total business inventories rose 0.3% in February as sales jumped 1.4%, another indication that companies are counting on consumer demand staying strong. Meanwhile, a survey from the National Assn. of Home Builders suggested housing construction may fall in the months ahead due to the Fed’s decision to boost borrowing costs by raising the overnight bank lending rate for the first time in two years on March 25.
Consumer Prices
Percent change, month to month, seasonally adjusted: March: 0.1%
Source: Bureau of Labor Statistics
