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October 18, 2000

U.S. Sept. Consumer Prices Rise 0.5%; Core Up 0.3%
By Siobhan Hughes, Bloomberg

Inflation Bears Down On Market ... Weiss comments

WASHINGTON - U.S. consumer prices outside of food and energy rose in September at the fastest pace in six months, driven by higher costs for clothes and cigarettes, government figures showed today.

The consumer price index's core rate rose 0.3 % last month after a 0.2 % gain in August, the Labor Department said. That was the largest gain since a 0.4 % rise in March and followed five consecutive months of 0.2 % gains.

Clothing prices showed the biggest rise in 10 years, while housing, medical care and tobacco costs all increased. "Inflation is broadening and pressures are beginning to build," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

Overall, the CPI rose 0.5 %, after dropping 0.1 % in August. Last month's gain was the largest since a 0.5 % jump in June and was led by rising energy prices.

Today's report could raise concerns for Federal Reserve policy-makers, who have indicated they might resume raising interest rates if inflation shows signs of accelerating. "Core CPI is a number that I look at, and it has been gradually increasing for probably the last eight or nine months or longer," Al Broaddus, president of the Federal Reserve Bank of Richmond, said yesterday.

Though the Dow has rebounded from a more than 400-point drop, the index remains below the 10,000 mark for the first time since March. The terrifying price swings we're seeing in the market today are partly fueled by the fear of inflation -- and there will be plenty more to come.

Today's Consumer Price Index report confirmed what we told you two days ago: Inflation isn't just a threat, it's here! Energy, food, clothes, housing, medical care, and tobacco product prices all increased substantially.

Aside from tobacco, these are all things that the average American can't live without. As the cost of essential items rise, workers will undoubtedly pressure employers for higher wages. With labor markets as tight as they are, it will be difficult for employers to refuse. And higher wages will force companies to pass along increased costs to consumers that much more quickly.

In a big turnaround from just a week ago, analysts are now admitting that a rate cut seems quite unlikely. Moreover, some analysts now agree with what we've been saying all along -- rates are headed higher next year. The Fed won't be able to sit on its hands while inflation is clearly in the here and now.

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