February 21, 2001

US Inflation Jumps
By BBC News

It's Not Just Energy Prices ... Weiss comments

WASHINGTON - Inflation in the US rose at twice the rate expected in January.

The US consumer price index (CPI) rose 0.6%, a rise reflecting the steep rise of 3.9% in energy prices.

But the core price - which excludes the volatile energy and food markets - was also higher than expected at 0.3%.

The rise puts inflationary concerns back in the foreground of the US' economic worries.

Falling stocks

This in turn means that the Federal Reserve is less likely to cut interest rates at the forthcoming meeting in March.

"I suspect that this is going to temper any talk of the Fed cutting interest rates by half a point at the next meeting," said Peter Cardillo, director of research at a New York brokerage.

And with reduced hopes of a further interest rate cut, investor confidence in stocks is decreasing.

The key US share indexes - the Dow Jones Industrial Average, the Nasdaq and the Standard and Poor's 500 futures contract - all began to fall after the news.

The 0.6% rise in the overall Consumer Price Index followed a surprise 1.1% surge in wholesale prices last month, the biggest jump in more than a decade.

High energy costs are getting the blame for the surge in consumer prices, but the fact is, consumer prices rose across the board last month. Prescription drugs, medical care, services, tobacco, transportation costs, new and used cars, and housing costs all rose at a higher rate than the previous month.

Inflationary pressures have been building for some time. PPI has shown an increase for the last five consecutive months, and CPI has increased for the past nine months in a row. But we now have three strong indicators telling us that inflationary pressures are getting much stronger. First, labor costs showed a steady rise for the third and fourth quarters of 2000, indicating that wage inflation is becoming a real concern. Then, the producer price index surged 1.1% in January, shocking economists. Now, the consumer price index rose 0.6% in January, double the expected number.

The Fed is publicly pleading with consumers to ignore inflation and keep on spending so that the economy will avoid a recession, but consumers aren't listening. Consumer confidence has sunk to levels not seen since 1993. The economy is heading straight into "stagflation" -- inflation with a dramatic slowdown in growth.

Today's CPI news certainly won't help the market recover from its latest losses. Investors know that with inflation creeping into the picture, the Fed won't be able to make deep cuts in interest rates to help turnaround the economy. Company earnings will continue to fall because of softening demand, falling productivity growth, and higher wage costs. And even though companies are trying to pass on higher costs to customers, a lack of confidence in the stock market, the job market, and higher prices will keep consumers from opening their wallets. Investors aren't likely to hold onto stocks as earnings keep disappointing them, inflation is on the rise, and the economy stops growing.

Plus, bonds are no safe haven in an inflationary environment. As stagflation works its way through the economy, investors are going to flee both the stock and bond markets in a hurry.

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