Transcripts

Inflation & The Producer Price Index

SUSIE GHARIB: mixed news today about inflation as investors try to gauge the risks that rising prices pose to the U.S. economy. The Labor Department reported wholesale prices rose in May by a greater-than- expected 1.4 percent. But excluding volatile food and energy, prices were up by only 0.2 of a percent. Suzanne Pratt takes a look at how these inflation pressures are likely to impact the markets and Federal Reserve policy.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Surging energy costs were largely responsible for the big increase in wholesale inflation. The rising price of many food items, including fruit and beef, was also to blame for the huge jump in the producer price index which measures the costs of goods before they hit the stores. Excluding food and energy costs, the so-called core rate of PPI was less threatening. But Citigroup economist Steven Wieting says it's misleading to exclude the cost of basic items like food and energy when evaluating the U.S. inflation picture.

STEVEN WIETING, SR. ECONOMIST, CITIGROUP: It's a primary cost for consumers, if we were looking at final consumer prices and these are important input costs for many retailing firms. These are wholesale, domestically produced prices and there is a lot of cost pressure.

PRATT: In the past year, the producer price index has gained more than 7 percent, and the core rate is up 3 percent. That's now well above the 2 percent level, which is widely accepted as the Federal Reserve's comfort zone for core PPI. And with the Fed's next meeting on interest rates only a week away, the latest inflation data rises new questions about what might happen to monetary policy. Still, like most economists, Mike Moran of Daiwa Securities thinks policymakers will stay the course at the June meeting.

MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES: I think Fed officials are concerned about inflation. I think they see upside risks on the inflation front, but I don't think they are quite prepared to tighten monetary policy just yet. We still have slow economic growth and you still have unsettled conditions in financial markets.

PRATT: The bond market continues to price in a hike in rates at the Fed's August or September meeting in an effort to rein in inflation. But some economists believe bond investors have gotten ahead of the Fed on that score.

MORAN: I think they might view it as a mistake to tighten monetary policy now and then have the economy slow later in the year when individuals are no longer receiving tax rebates. I think they'd like to wait until the latter part of this year or even early next year before they begin hiking interest rates.

PRATT: The near-term outlook for inflation is not good. In just the first half of June, crude oil prices are up more than 5 percent, putting more pressure on consumers and businesses. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.