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October 16, 2000

Fed's Guynn Says Oil Prices Aren't Inflationary Yet
By Dow Jones Business News

Oil Prices ARE Inflationary ... Weiss comments

SEA ISLAND, Ga. -- While the sharp rise in oil prices has yet to stoke significant inflationary pressures in the U.S. economy, the risk of high prices going forward remains the Federal Reserve's primary concern, said Jack Guynn, president of the Federal Reserve Bank of Atlanta.

He went on to say that at the same time the economy's overall level of growth shows signs of moderating, so too does the rate of productivity gains. Mr. Guynn said that going forward, he sees annual productivity growth at around 2% to 3%.

Speaking to reporters at a conference on electronic finance, Mr. Guynn said so far rising oil prices have had their greatest impact on corporate bottom lines. He noted competitive pressures that are keeping prices tightly reigned are still very much in effect and are leaving businesses with little ability to increase prices to compensate for higher energy costs.

Even so, Mr. Guynn reiterated that the Fed's chief concern going forward remains the possibility of higher inflationary pressures that may result from oil gains and what he said was a still very tight labor market.

'The risk of inflation growing is greater' than the chance that certain factors, such as continued strong productivity gains, will offset those prices, said Mr. Guynn, a member of the Federal Reserve's monetary-policy-setting arm, the Federal Open Market Committee.

High oil prices have, in fact, 'stoked significant inflationary pressures in the U.S. economy'. Last Friday's release of the producer price index shocked Wall Street economists when it jumped 0.9% in September. And it was clear from the report that essentials such as gasoline, heating oil and food rocketed the index higher. We expect to see a similar jump in the CPI release this week, too.

Jack Guynn pointed to high oil prices, a tight labor market, and the expectation of slowing productivity as reasons why inflation remains a threat. News flash, Jack. Inflation is already here. High oil prices, a tight labor market, and slowing productivity are reasons why it will get much worse.

Any increased tensions in the Middle East will catapult oil prices into the stratosphere. Furthermore, the unemployment index fell to 3.9% in September, its lowest in 30 years. A tight labor market combined with slowing productivity and higher fuel prices will certainly force wages higher. Plus, consumer spending is still strong, adding to inflationary pressures.

Don't be surprised to see a rate boost early next year -- not the rate cut that everybody's been hoping for.

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