April 20, 2005


Prices help tame inflation (ASSOCIATED PRESS and REUTERS, April 20, 2005)

In a much-anticipated report on inflation, the Labor Department said yesterday that wholesale price increases apart from volatile food and energy costs remained mild last month, helping ease inflation jitters and giving a boost to financial markets.

The Labor Department reported a 0.7 percent increase in March for its Producer Price Index, designed to track inflation pressures before they reach the consumer. It was the index's biggest gain since November and was led by a 3.3 percent increase in energy prices, reflecting soaring global oil prices.

However, apart from food and energy, inflation at the wholesale level rose by just 0.1 percent.

Posted by Orrin Judd at April 20, 2005 8:26 AM

The Fed is expected to raise rates an additional quarter-point to 3 percent at its next meeting May 3.

What is Greenspan trying to prove? What is wrong with growth without inflation? My 401k would like to know.

Posted by: Pat H at April 20, 2005 9:28 AM

The Fed exists exclusively to fight inflation, so it does even when there is none.

Posted by: oj at April 20, 2005 9:33 AM

Nice chart - going high tech?

3% has historically been considered a neutral Fed Funds rate i.e. not restrictive or expansive. The forward market curve currently expects Fed Funds to get to 4% by year-end. As the graph shows the flattening curve certainly suggests that the market isn't building in much inflation expectations.

Posted by: AWW at April 20, 2005 9:34 AM

oj - It's always the case that when the Fed raises short rates, the yield curve flattens, so the slope change you see is normal. The fact that long yields fell indicates that the old Fed policies were inflationary, not that the new rates are too tight. The Fed should keep raising rates until long rates stop falling.

Posted by: pj at April 20, 2005 10:44 AM

AWW - The declining long yields show that the market is decreasing its inflation expectations. In the absence of inflation expectations, long yields should approximate the real growth rate of the economy, 3-4%.

Posted by: pj at April 20, 2005 10:49 AM

PJ - I agree, I just didn't phrase it well.

Posted by: AWW at April 20, 2005 1:43 PM

PJ: Agreed. All of which means the Fed would do well to let the May 3 meeting go by and leave rates unchanged while the economy digestst the last few inputs.

Posted by: John Resnick at April 20, 2005 2:20 PM

i guess if you eliminate enough categories you can show inflation to be as low as you want. my grocery bill is second only to my mortgage, so the inflation rate on food is very relevant to me. that said i only have a 3 mile drive to work so i am doing ok on the energy front.

Posted by: cjm at April 20, 2005 7:55 PM