CNN: Has inflation returned?CPI's surge shows price increases in many sectors of the U.S. economy

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CNN: Has inflation returned?

CPI's surge shows price increases in many sectors of the U.S. economy

By Staff Writer Martha Slud April 14, 2000: 5:09 p.m. ET

NEW YORK (CNNfn) - For economic sleuths scouring the U.S. economy for signs of inflation, Friday's jump in consumer prices armed them with plenty of evidence that costs for everything from housing to haircuts are indeed on the upswing.

The Labor Department said Friday that the March Consumer Price Index - a key gauge of inflation - rose at its fastest rate in almost a year, sparking a massive sell-off in stocks as investors feared the inflationary data would trigger another interest rate hike by the Federal Reserve to cool off inflationary pressures. The Dow Jones industrial average sank 616 points - its biggest one-day point drop ever - to 10,307, while the Nasdaq composite sustained a 355-point plunge.

The CPI gained 0.7 percent, exceeding the 0.5 percent increase of a month earlier and the 0.4 percent jump anticipated by analysts. Meanwhile, the core rate, which excludes the volatile food and energy sectors, rose a higher-than-expected 0.4 percent.

But is inflation truly starting to pick up? Or can the numbers be written off as an aberration?

While many boosters of the U.S. economy have long pointed to the economy's seeming absence of inflation from the economy, some economists say Friday's data are the latest sign that inflation is indeed afoot in the economy -- with price increases seen in housing, airfares, tobacco, medical costs and other areas.

But others caution that many of the price increases are likely tied to seasonal or one-time factors and not the start of a long-term inflationary trend.

"We have been experiencing some gradual inflation pressures for some time.

"It's not terrible but it is creeping back," said Douglas Lee, president of Economics from Washington, a consulting firm for institutional investors. However, he said, "you don't want to make too much out of the one-month number."

"I don't think we're in danger of going back to the kind of cycles of the '70s or the late '80s," added Alan Levenson, chief economist at T. Rowe Price. "I think the economy is still quite flexible."

The consumer price data requires close inspection, said Kathleen Camilli, chief economist at Tucker Anthony. She said the price rises are mostly tied to higher prices for oil, which comes through in transportation increases and housing cost spikes as well as seasonal factors such as higher hotel room prices - also a part of the index's housing component.

The data represents "a cyclical blip in inflation," she said. "It doesn't change the longer-term inflation outlook."

Indeed, most of the inflation growth comes from the service sector - not for goods such as food or apparel, Lee said.

"If you look at food, clothing, things like that, there isn't much evidence of inflation," he said.

However, the numbers show inflation pressures virtually across the board, said John Ryding, chief economist at Bear Stearns. "It's pretty broad-based, so you can't go in and say, 'I can excuse that number because it was this component and that's a special factor,'" he said.

Faster-than-expected price growth

The March jump in the CPI was triggered by a 4.9 percent increase in energy prices, the largest since April 1999. Higher energy prices triggered a 4.6 percent rise in airfares, while transportation prices rose by 2.5 percent.

Housing prices rose 0.4 percent, while tobacco rose 1.1 percent, triggered by a price increase from cigarette companies to cover settlement costs for tobacco litigation.

However, food prices rose a modest 0.1 percent last month, kept in check by lower prices for fruits, vegetables and dairy products.

Economists say that most consumers really are not seeing the effects of inflation, at least not at first glance. One of the biggest spots of inflationary growth is medical costs - an area where much of the costs are picked up by insurance rather than out of pocket.

However, "in recent years companies have lowered the amount of insurance costs that they pay," Lee said. "Your co-pays have gotten bigger; and consumers actually are spending a little more out of pocket than they used to."

Another economist said that while the CPI data looks bad at first glance, but in reality it follows a seasonal pattern seen in the first quarter of the past four years.

"For those claiming that inflation is right around the corner, they can point to this number and say, 'Aha, it's justified,'" said National Association of Manufacturers economist Gordon Richards. "In my mind, this is really a one-time development and we're more likely to see more benign inflation data later in the year. But these numbers are terrible. They make an increase in interest rates all but inevitable."

But while many investors panicked at the data, the fact that inflation is indeed a reality shouldn't have come as much of a surprise, said Jeff Warantz, a market strategist at Salomon Smith Barney. (WAV411K) (411AIF)

"For weeks, for months, we've been told there is no inflation (and that) even though unemployment is so low, inflation is at bay," he said. The CPI number "shouldn't really have shocked anybody. Anyone who goes to the gas pump or anyone who pays for heating oil knows that prices have been moving up."

http://cnnfn.com/2000/04/14/economy/inflation/



-- Carl Jenkins (Somewherepress@aol.com), April 16, 2000


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