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September 27, 2000

Inflation Higher Than Reported
By John M. Berry, Washington Post

Fed Must Revisit Interest Rate Decision ... Weiss comments

WASHINGTON - Consumer price inflation has been slightly higher over the past year than officially reported because of a calculating glitch at the Bureau of Labor Statistics, government sources said.

The bureau is preparing to revise upward the change over the last year in its consumer price index, the nation's most closely watched measure of inflation and the one used by the government to calculate cost-of-living adjustments in Social Security payments, veterans benefits and federal pensions.

For the 12-month period ended last month, consumer prices rose 3.4% -- partly as a result of surging energy prices -- while the core CPI, which excludes energy and food items, rose 2.5%.

The revision, which could be announced before the end of this week, is likely to result in an official inflation rate that is higher by about 0.1 to 0.3% for the past 12 months, the sources said.

The Fed already wasn't happy about inflation rates inching higher over the past year. In fact, the Fed's decision to halt its series of interest rate hikes was directly related to its belief that higher productivity balanced out higher inflation. However, the accuracy of this assumption is now in question. Now, the Bureau of Labor Statistics tells us that the CPI is higher than previously reported. And, this isn't merely a one-month revision, the BLS has been diluting inflation for the ENTIRE YEAR.

If the Fed leaves rates alone on October 3rd - a likely decision with the elections just over a month away - then expect an even greater rate hike at the next meeting. Indeed, with the inflation picture hotter than expected, the Fed will likely continue with a series of rate hikes next year.

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