US Price Data Cements Rate Rise Expectation : LUSENET : TB2K spinoff uncensored : One Thread

Wednesday March 15 1:52 PM ET

US Price Data Cements Rate Rise Expectation

By Marjorie Olster

WASHINGTON (Reuters) - U.S. import prices for February raced up at the fastest pace in nine years as oil prices surged, fanning fears of inflation and solidifying expectations for a Federal Reserve rate hike next week.

Separate reports also released on Wednesday showed U.S. gasoline inventories, cited last month by Fed Chairman Alan Greenspan as a key buffer against price swings, slid to the lowest levels in 30 years.

The government said the current account deficit widened to new records late last year. Industrial output rose a mild 0.3 percent last month while business inventories remained lean.

``The bottom line for the Fed is (the new data) are just another little prod to tighten next week,'' said Ethan Harris, an economist at Lehman Brothers in New York.

The policy-setting Federal Open Market Committee meets Tuesday and is widely expected to nudge up the 5.75 federal funds rate on overnight lending between banks to 6.0 percent.

Concerned that the economy may overheat as a result of strong domestic demand, the Fed wants to slow the pace of consumer spending.

A new inflation worry has crept up on the Fed recently -- that surging oil prices could translate into rising costs across a broader range of goods and services outside of the energy sector.

Inflation jitters had U.S. markets firmly focused on the month's two key price reports -- the Producer Price Index due on Thursday followed by the Consumer Price Index on Friday.

The Labor Department reported on Wednesday U.S. import prices shot up a stronger-than-expected 1.9 percent in February, the biggest jump since October 1990's 2.9 percent. January import prices were revised up to a 0.3 percent gain.

Most of February's increase stemmed from imported petroleum which spiked 13.9 percent last month. Last week, oil prices saw the highest peaks since 1991, the year of the Gulf War.

``One nagging worry off to the side for the Fed is the run-up in oil prices. It creates a lot of uncertainty but it is not clear which way they should move because of it,'' Harris said.

``A higher oil price does damage consumer spending and does point to slower growth going forward. But the Fed is now worried energy prices are going to filter through to general inflation in the economy, to core inflation,'' he added.

The American Petroleum Institute (API) said on Wednesday U.S. gasoline stocks at the end of February fell to the lowest mark in about three decades of 198.6 million barrels.

The API report showing depleted stocks came as the Clinton administration was stepping up efforts to persuade OPEC members to increase production when the cartel meets in 10 days.

Deficit Soars

The Commerce Department reported the U.S. current account deficit, the broadest measure of foreign trade, widened 12 percent in the fourth quarter to a record $99.78 billion, surpassing the third quarter $89.09 billion.

For the year, the deficit saw a massive 53.7 percent increase to $338.92 billion versus $220.56 billion in 1998.

``That is one of the growing imbalances the Fed is worried about. But it's not something they can do much about,'' said Mark Vitner, economist at First Union Corp. in Charlotte, N.C.

The Fed says the current account deficit at these levels is not sustainable in the long run but is not an imminent threat to the already record-length U.S. expansion.

Wednesday's data, taken with strong retail sales for February released on Tuesday, paint a strong picture of first-quarter gross domestic product growth, said Harris, who currently estimates it around 5.8 percent.

``That is a very strong number. The consumer sector is roaring -- there is no slowing at all,'' he said.

Though the 0.3 percent rise in industrial production for February was milder than forecast, economists noted the Fed revised up the January and December figures.

``That suggests there's a fair amount of underlying momentum in the manufacturing sector,'' said Mike Niemira, senior economist at Bank of Tokyo-Mitsubishi Ltd. in New York.

Harris said new Commerce Department inventory data showed U.S. businesses were keeping supplies lean, pointing to strong demand and continued robust growth. Inventories rose 0.5 percent in January, matching December's rise.

-- viewer (, March 15, 2000

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