Transcripts

The Interest Rate Reduction Seems To Work Against Inflation

SUZANNE PRATT: American consumers got a bit of a break last month as consumer prices fell unexpectedly and housing starts hit their slowest pace in 12 years. The reports were seen as justification for the Federal Reserve's rate cuts yesterday and its apparent policy shift away from inflation as its primary concern. But as Erika Miller reports, some economists fear rising energy costs will ultimately push inflation higher.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's tame inflation reading and weak housing data were welcomed by economists because the numbers support the Fed's view that slowing growth is a bigger threat to the economy than inflation. Consumer prices fell 0.1 of a percent last month, the first decline in 10 months. But much of the drop came from sharply lower gasoline prices. Excluding volatile food and energy costs, the core rate rose a modest 0.2 of a percent for the second month in a row. Economist Lakshman Achuthan of Economic Cycle Research says the data is not a fluke.

LAKSHMAN ACHUTHAN, ECONOMIST, ECONOMIC CYCLE RESEARCH: It's part of a trend towards more benign inflationary readings, which is a stroke of luck for the Fed in that it gives them more leeway to act if need be.

MILLER: The latest report on the housing industry underscored the meltdown in that sector and offered support for the Fed's aggressive rate reduction. Housing starts fell 2.6 percent in August to their lowest level in over a decade. Building permits, an indicator of future construction, dropped nearly 6 percent. Now, investors wonder whether more Fed rate cuts will follow this year. Some economists worry that inflation could start to flare up, reducing those odds. Gold, which traditionally does well in an inflationary environment, is at its highest level in more than 25 years. And crude oil futures surged to a new record of $81.93 a barrel at the New York Mercantile Exchange today. Oil futures trader Joe Terranova predicts extreme price swings in coming months.

JOSEPH TERRANOVA, TRADER, MBF CLEARING CORP.: I think crude oil has a floor of $68 to $72. I don't think you're going to see prices go below $68 to $72. And we are susceptible for times for the price to spike up to $85 to $90.

MILLER: Already, economists are predicting elevated inflation readings for September due to higher gasoline costs, but they say the more closely watched core rate to continue to show a downward trend. Erika Miller, NIGHTLY BUSINESS REPORT, New York.