Transcripts

Gas Prices Pump Up Consumer Prices

JEFF YASTINE: Consumer prices increased at their fastest pace in months in May, thanks to a big jump in gasoline prices. But while those prices rose more than expected 0.6 of a percentage point last month, there were no alarm bells on Wall Street. That's because the core rate, which excludes the volatile food and energy sectors, inched up a tame 0.2 of a percent. Well that sparked a relief rally for stocks with the Dow adding 165 points and the NASDAQ rising 50. As Erika Miller explains, the core reading has economists more optimistic about the inflation picture.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Anyone who fills up a car or buys food at the supermarket probably is not surprised that consumer prices rose sharply last month. But if you strip out gas and groceries, economist David Resler says prices are stable, even falling.

DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES: Outside the food and energy block, price weakness has been evident. Car prices are lower than they were a year ago. Apparel prices lower than they were a year ago. Medical care costs not as - rising less rapidly than they were a few months ago.

MILLER: To him and others, that's proof that higher food and energy costs are not creeping into the broader economy. Citigroup's Robert Diclemente believes that trend can continue and he points to today's Reuters/University of Michigan's consumer sentiment data for support. The index fell in June to the lowest level since 1980, even though many consumers received Federal rebate checks during the month.

ROBERT DICLEMENTE, CHIEF US ECONOMIST, CITIGROUP: Sentiment obviously is quite downbeat, and that's part of the reason why I think inflation is going to have a very hard time regaining traction. People don't plan to buy large household goods. That creates enormous competitive pressure on businesses that are there.

MILLER: There is debate over how the Federal Reserve will interpret today's inflation data. Year over year, core consume prices are up 2.3 percent above the Fed's comfort zone, which tops out at 2 percent. That's part of the reason some economists think central bankers will ratchet up concern about inflation at their next policy meeting June 24 and 25. But most Fed watchers do not think policy makers will be worried enough to raise rates then or even later this summer.

DICLEMENTE: No, I don't think that's very likely. Certainly you can imagine a scenario in which, if inflation expectations continue to inch up, they could be forced into this.

MILLER: If the Fed does hike rates in the coming months, many economists believe it would be a grave mistake. They say the bigger threat to the economy is not inflation but recession and higher rates could make that worse. Erika Miller, NIGHTLY BUSINESS REPORT, New York.