Oil Prices Pump Stocks in the Right Direction
Wednesday, July 16, 2008SUZANNE PRATT: A big bounce back on Wall Street, as better-than-expected earnings from Wells Fargo sparked an explosive rally in bank stocks. The Dow surged 276 points, the NASDAQ gained 69. The S&P financial index posted its biggest one-day gain ever. Every bank in that index rose at least 10 percent, with Wells Fargo skyrocketing 33 percent. Also boosting stocks, a big drop in oil prices for the second day running. August crude oil futures tumbled $4.14 to $134.40 a barrel. All that good news overshadowed bad news on inflation. The consumer price index jumped 1.1 percent last month. We have two reports this evening looking at that uptick in inflation and how Fed Chairman Ben Bernanke handled it as he testified on Capitol Hill. We begin with Suzanne Pratt.
SUZANNE PRATT, NBR CORRESPONDENT: For consumers, the latest inflation data shows exactly how painful it is to live in the U.S. The price of gasoline up more than 10 percent last month. Vegetables up about 6 percent, the biggest gain in seven years. Beyond food and energy, education costs rose 0.5 percent, and airfares soared 4.5 percent. Compared with a year ago, the consumer price index, which is the government's key inflation gauge, is up a hefty 5 percent, the biggest gain since 1991. The core rate is up 2.4 percent. Lehman Brothers economist Ethan Harris says there's more pain ahead for Americans.
ETHAN HARRIS, LEHMAN BROTHERS: I think inflation is going to get worse before it gets better. We expect the headline CPI to peak at 5.5 percent with the release of the August data. And even the core measure, which has been running in the low 2 percent range, should creep up by a few tenths from here going forward.
PRATT: Rising energy costs are largely responsible for the uptick in inflation. In the last two days, however, crude oil futures have fallen more than $10 dollars a barrel, suggesting there may soon be some relief for consumers. But oil trader Ray Carbone predicts any easing in energy prices will be short-lived.
RAY CARBONE, PRESIDENT, PARAMOUNT OPTIONS: I think this is a supply/demand issue still. I still believe in the emerging market demand, and I think eventually prices are heading back up. I would not be a seller here down at the bottom of the bracket.
PRATT: If Carbone is correct and oil prices rally higher in the coming months, experts say the U.S. economy will remain under pressure. Some economists say they are more concerned about the erosion of spending power for consumers and not the long-term effects of inflation.
HARRIS: If these scare stories about $200 oil are correct, then a significant recession in the U.S. is very likely. It's very, very troubling to see oil prices continue to rise with this much weakness in the U.S. economy, clear signs of weaker demand for oil, and a global economic slowdown.
PRATT: For now, experts say there's so much fear in financial markets that higher inflation does not mean higher interest rates. But most economists agree Federal Reserve policymakers are in a very tough spot. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NBR CORRESPONDENT: This is Darren Gersh in Washington. Shortly after that eye-popping CPI report, Fed Chairman Ben Bernanke responded to a question from Congressman Ron Paul, who asked whether inflation is taxing the wallets of American consumers.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I couldn't agree with you more that inflation is a tax, and that inflation currently is too high. And it's a top priority of the Federal Reserve to run a policy that's going to bring inflation to an acceptable level consistent with price stability as we go forward.
GERSH: But how to get there? The Fed chairman and his colleagues consider the outlook on growth considerably uncertain, but see the outlook on inflation as unusually uncertain. Having weighed the evidence, markets are putting even odds on a Fed rate hike by the October 29th meeting. Fed watcher Adam Posen thinks the Fed will move against inflation by the end of the year.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INST. FOR INTERNATIONAL ECONOMICS: We're in a situation where the inflation risks are real. There's still some risk to the real economy in terms of growth. But we've shifted to where the inflation risk are outweighing that. That is kind of good news, because it means the worst of it may be over.
GERSH: As for the stability of the financial system, Bernanke told Congress Freddie Mac and Fannie Mae are in, quote, "no danger of failing." But longer term, he suggested Congress will have many options for reform to consider.
BERNANKE: There are certainly a number of different possibilities ranging from outright nationalization to privatization to breaking them up. In the near term, thinking about the needs of the housing market, I think the right solution is to keep them in their current form, but to provide very strong oversight that will assure adequate capital going forward.
GERSH: Many members of Congress wanted the Fed chairman to know their constituents are hurting. Bernanke agreed, calling this a rough time for average families. But not all the news is bad. Productivity is still growing faster than almost any other industrialized country, and that was today's happy thought.
BERNANKE: We will work our way through these financial storms. We will work our way through this cyclical movement that we have. And the economy will return to good growth. But we just have a few things to work through on the way to doing that.
GERSH: Many Democrats aren't willing to wait. They're pressing for a second stimulus package to boost the economy. Bernanke called that effort premature. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
