Transcripts

How Inflation Stands To Influence Interest Rates

SUSIE GHARIB: Even though oil prices are coming down, consumer prices are on the rise. The Labor Department said today that its consumer price index rose a half a percent in December. The big question now is whether the inflation report changes the outlook for interest rates. Erika Miller reports.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's inflation data has many economists even more confident the Federal Reserve won't cut interest rates soon. The consumer price index, which measures inflation at the retail level, rose a half a percent in December. That's the biggest gain since April. The core rate, which excludes volatile food and energy costs rose 0.2 of a percent after a flat reading in November. The data shows core consumer prices rose 2.6 percent in 2006. That's well above the Fed's comfort zone, which S&P economist David Wyss says is about 2 percent.

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S: Obviously, there's concern. The Fed is very worried that the inflation rate is going in the wrong direction and we're seeing some upward pressure on wages, which has them worried. So, they are going to be looking very closely to see what happens to the labor market, to wages and what the impact of that is on these core inflation rates.

MILLER: Nearly every category in the December survey posted an increase. But energy was by far the biggest gainer, up 4.5 percent. Some economists say the latest data is another sign that inflation is not easing as quickly as the Federal Reserve would like. Nearly everyone on Wall Street expects the Fed to hold short term interest rates steady at its next meeting January 30. But some Fed watchers think the central bank could raise rates a quarter of a percentage point at the following meeting in March to ensure inflation remains subdued. Others, like economist Joe Lavorgna of Deutsche Bank think the Fed's next move will be a rate cut, perhaps as soon as May.

JOSEPH LAVORGNA, CHIEF US ECONOMIST, DEUTSCHE BANK: We believe if the economy retains its current momentum, inflation is likely to stay where it is, if not drift lower. And the Fed will not have to raise rates in response to inflation.

MILLER: The good news for investors and consumers is that many economists think inflation pressures will retreat in the months ahead. They predict that falling oil costs will lead to lower costs for many other goods and services. Erika Miller, NIGHTLY BUSINESS REPORT, New York.