| Smith
Faculty Opinion Article |
February 17,
2006 |
Producer Prices Increase Creating
Tough Choices for Bernanke
By Dr. Peter
Morici, Professor of International
Business
Today, the Labor Department reported
the Producer Price Index increased
0.3 percent in January, despite flat
energy prices.
Core producer prices producer
prices less food and energy rose
0.4 percent.
The consensus forecast was 0.3
percent for the broad index and 0.2
for the core. Economists were
genuinely surprised by the surge in
core inflation.
Monthly producer price movements are
erratic, and the increase in core
inflation follows five months of
near zero inflation. This
inflationary jolt is no reason to
panic.
Next weeks CPI data could reflect
renewed inflationary pressures as
well. Gasoline prices did rise in
January. Spot prices for natural gas
fell in December and January but it
is not clear how much of these mark
downs filtered through to home
owners and commercial consumers.
The Fed will increase the Federal
Funds rate to 4.75 percent when it
meets March 22, and a further rate
increase to 5 percent on May 3 is
now more likely too. However,
further pushing up interest rates
risks slowing growth too much,
raising unemployment and torpedoing
the recent modest improvement in
inflation adjusted wages.
The housing market is weakening.
Housing prices will likely falling
this winter and be only stable
prices this spring. The new home
industry may quickly find it has too
much inventory.
Pushing the Federal Funds rate past
4.75 percent would risk pushing down
housing prices significantly and
seriously wounding an economy headed
for a soft landing by mid-year.
Peter Morici is an economist and
professor at the Robert H. Smith
School of Business, the University
of Maryland, College Park, MD.
E-mail:
pmorici@rhsmith.umd.edu.
