Home >> United States & Canada >> Economics & Trade

     Email   Print 

The Fed Likely to Keep Increasing Interest Rates

Prof. Peter Morici - 4/19/2006

Today, the Labor Department reported that the Consumer Price Index rose 0.4 percent in March on a seasonally adjusted basis, as energy prices surged 1.3 percent. The consensus forecast and my forecast published by Reuters were 0.3 percent. Core producer prices—producer prices less food and energy—rose 0.3 percent in March. The consensus forecast and my forecast published by Reuters were 0.2 percent, as core inflation surged more than economists expected.

In February the broad index and the core index both increased 0.1 percent.

The outlook for inflation is significantly colored by energy prices.

Gasoline prices were lower in February but rose again in March. The average retail price of gasoline in March was $2.47 per gallon, up from $2.33 per gallon in February. By the week of April 17, average gasoline prices hit $2.83 a gallon, and are piercing $3.00 a gallon in many places. Gas prices are likely to go higher through the spring driving season.

Seasonally adjusted food prices were up 0.1 percent in March. This was much less than the 0.5 percent increase reported in wholesale prices reported yesterday. This indicates April consumer food prices should surge a bit. However, food prices are erratic from month to month, and pricing pressures in this segment should moderate later in spring and summer.

The March surge in core consumer prices should not cause alarm. Over the last three months, core consumer price inflation has averaged 0.2 percent. Wholesale prices, excluding energy and food items, increased only 0.1 percent in March.

Productivity growth appears to be recovering, and producers of nonenergy products should be able to absorb energy prices without pushing up prices for other consumer goods. Corporate profits continue to rise strongly even as nonenergy consumer prices remain reasonably contained.

Overall, consumer price inflation, outside the energy sector, should remain contained, and the outlook for core consumer prices remains good.

Surging petroleum prices will drive broader indexes of inflation higher, and the Fed will want to make certain inflation is safely inside the bottle and the cork is firmly secured.

Analysts seized on some dovish sentiments expressed in the March 27-28 Federal Open Market Committee Minutes released yesterday; however, those Committee views about future interest rate policy were expressed before the recent surge in gasoline prices.

The Fed is expected to raise the Federal Funds rate to 5 percent on May 10. Surging energy prices will cause the Fed to seriously weigh raising interest rates further.