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December 18, 2000

Murky Data Spark Debate Over Inflation
By Yochi J. Dreazen, The Wall Street Journal

All I Want For Christmas... Is a Rate Cut? ... Weiss comments

WASHINGTON -- A batch of murky data are making it difficult to determine whether inflation is heating up.

While most analysts believe that the Federal Reserve may cut rates next year to avert a potentially significant slowdown, the central bank's Federal Open Market Committee is expected to drop its policy of treating inflation as the economy's biggest threat when it meets Tuesday -- and could even cut interest rates at the meeting.

Nearly every scenario that ends with a rate cut is predicated on the assumption that inflation, long the Fed's prime concern, is under control. Commodities and energy prices have begun to moderate, keeping wholesale inflation tame. But consumer inflation has been inching higher and has now plateaued at a point well above year-earlier levels. The increases might make talk of a rate-cut premature.

The monthly increases set off few alarms. Last week, the Labor Department said the consumer price index, the government's main inflation gauge, rose 0.2% in November, matching the October increase. Cheaper clothing prices, combined with modest increases in the costs of food and energy, helped to control the overall measure.

The core CPI, which excludes the volatile food and energy sectors, rose 0.3%, a notch above October's 0.2% increase. The number was distorted by a 3.6% surge in tobacco prices. Excluding tobacco, the core would have risen just 0.2%.

The longer-term picture is more worrisome, however. From January through November, consumer prices rose at an annual rate of 3.5%, fueled by soaring energy costs. That compared with a pace of just 2.7% in 1999. Core prices, meanwhile, advanced at a 2.7% pace during the 11-month period, markedly higher than the 1.9% rise in 1999.

Besides the approaching holidays, the Fed is on everybody's mind this week. The market anxiously hopes for a rate cut or, at the very least, a shift to a neutral bias. But, as this article points out, it is far too early to deliver that present. In fact, the economy would be far better off if it got lost in the mail.

Inflation is still a real threat. Consumer prices, both overall and core prices, have increased over the course of the year and show no signs of falling. With oil and gas inventories at record lows, energy prices remain extremely volatile. And that means prices could skyrocket on any given day as they have proven time and again this year.

Investors may want an early Christmas present, but the economy would be better off in the long run if the Fed played the role of the Grinch instead.

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