Smith Faculty Opinion Article	September 18, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

Consumer Prices Up 0.2 Percent in August Inflation Moderates and Stock Prices Should Benefit

Today, the Labor Department reported that the Consumer Price Index rose 0.2 percent in August, after rising 0.4 percent in July. The consensus forecast was 0.3 percent, and my forecast published by Reuters was 0.2 percent.

Seasonally adjusted, food prices were up 0.4 percent in August, after rising 0.2 and 0.3 percent in July and June. Energy prices were up 0.3 percent in August, after rising 2.9 percent in July and falling 0.9 percent in June.

Energy and food prices are quite erratic month to month, and Federal Reserve policymakers pay close attention to movements in the core index. The Federal Reserve is particularly concerned about the pass through of higher petroleum prices into other sectors of the economy.

Core producer prices producer prices less food and energy rose 0.2 percent in August, after rising 0.2 percent in July and 0.3 percent in June. The consensus forecast and my forecast were 0.2 percent.

Since August 2005, core consumer prices have risen 2.8 percent, and the compound annual rate of change for the three months ending in August was 3.0 percent.

Core consumer price inflation remains above Ben Bernanke's target range of one to two percent. However, core consumer price inflation in August reflected the continuing pass through of prior months surges in energy prices to non-energy products. Those pressures are now reversing.

Slowing economic growth, falling housing prices, and falling oil and natural gas prices should relieve pressures on both the energy and core price index. Inflation should cool significantly in September and October.

Growth should moderate to about 3 percent, perhaps a bit higher. Consumer spending will demonstrate unexpected resiliency during the holiday season, because gasoline prices are now falling below their levels this time last year, and housing prices are moderating but not collapsing.

Falling gasoline prices are freeing up disposable income for other consumer spending, and home prices, though moderating, still reflect several years of robust appreciation. Consumers still have considerable equity to tap. Hence, falling gasoline prices will bolster consumer confidence and home equities will finance stronger than expected holiday spending.

Falling energy prices, moderating inflation and healthy holiday sales will provide a formula for stronger corporate profits. This will ignite investor confidence. The outlook for an end of the year rally looks very good.

Portfolio investment will shift to stocks and conditions are ripe for a long awaited bull run on Wall Street.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.