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November 16, 2000

Consumer Prices Rise Modestly in October
By Tim Arango, Reuters

Fed Won't Change Tightening Bias ... Weiss comments

WASHINGTON - Consumer prices rose only modestly in October, offering evidence that could lead the Federal Reserve to alter its long-standing view that inflation remains a danger to the U.S. economy.

The Consumer Price Index rose 0.2% in October, following a larger-than-expected 0.5% rise in September, the Labor Department said Thursday. The core CPI -- which excludes the often-volatile food and energy sector and gives a clearer picture of inflation -- also rose by 0.2%, compared with a 0.3% rise in September.

Both the headline and core CPI figures matched the expectations of economists polled by Reuters.

The data comes a day after the Federal Reserve met in Washington and kept interest rates unchanged. The Fed did not, however, change its view that inflation remained a danger.

Over the last 17 months the Fed has raised rates six times in an effort to cool the economy and engineer its "soft landing" scenario of moderate growth. In recent weeks, it appears the Fed's efforts have succeeded and now many economists expect an interest rate reduction in the first half of next year.

The Labor Department said energy prices -- which surged 3.8% in September -- slowed to a 0.2% rise in October. Economists had feared that rising oil prices could lead to general price inflation.

Inflation is still a strong undercurrent in the economy. Seasonally adjusted, the consumer prices rate rose 3.6 percent in the first 10 months of 2000. For all of last year, the inflation rate was just 2.7 percent. This means the Fed has no reason to abandon its bias toward inflation. Higher oil prices, a tight labor market, and slowing productivity are still real concerns for Alan Greenspan's inflation busters.

Energy prices are not easing. In fact, while much of this nation was distracted by the election limbo, OPEC announced that it is no longer going to increase output when oil prices rise. Apparently, the OPEC member countries developed a taste for the higher prices. The next time there is a crisis that pushes oil prices through the roof, don't look to OPEC to come to the rescue with a new infusion of oil.

Sustained high energy prices will certainly pressure businesses to raise their prices. Plus, a tight labor market will force businesses to sweeten the pot for workers with wage and benefit increases as they try to offset the high costs of gasoline and home heating oil.

You don't need a crystal ball to see the near future: Higher inflation, and no rate cut.

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