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By Jason Simpkins
Inflation rose substantially in the month of March, according to both the consumer price index (CPI) and producer price index (PPI), and many analysts expect it will worsen as the U.S. Federal Reserve continues slashing its benchmark lending rate to fend off a recession.
The Labor Department reported yesterday (Wednesday) that consumer prices rose 0.3% in March after a stagnant February. The CPI showed a 1.9% jump in energy costs, with gasoline prices up 1.3% and natural gas prices up 4.6%.
Total consumer price inflation is up 4% over the past year with sharp jumps in food and energy prices leading the way. Food prices are up 4.4% in the past 12 months, while energy prices have shot up 17%. Worse, most analysts believe energy costs will keep rising to reflect the large jump in the price of crude oil, which has scaled higher than $114 per barrel.
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The PPI, which measures inflation pressures at the wholesale level, leapt 1.1% in March after a 0.3% increase in February. Wholesale inflation was up 6.9% year-over-year, while core inflation – which excludes food and energy – was up 2.7%, the biggest unadjusted increase since July 2005.
"It's a pretty ugly report," Joseph Lavorgna, chief U.S. economist at Deutshe Bank AG (DB) told the International Herald Tribune. "Not just because headline is up so much on rising food and soaring energy prices, but the significant re-emergence of inflation pressure at an earlier stage of processing, mainly at core crude and core intermediate prices."
The rate of inflation is almost a direct response to the depreciation of the U.S. dollar, which fell a full 1% against the euro to $1.5969, a record low and the currency's biggest decline in three weeks. The dollar has plunged 15% against the European currency since September, the month the U.S. Federal Reserve first began cutting its target lending rate.
The Fed has cut its benchmark Federal Funds Rate six times since September taking it from 5.25% to 2.25%. And some analysts believe Fed Chairman, Ben S. Bernanke has more reductions in store.
"The Fed is not so interested in inflation, currently," Jorg Kramer, chief economist at Commerzbank AG (OTC: CRZBY) in Frankfurt, told IHT.com, "They have a bigger problem: recession."
Kramer thinks the Fed will cut its funds rate to 1.25% by June.
The Fed's recently released Beige Book – a collection of anecdotal information gathered from its 12 regional banks – indicated economic conditions have weakened across the nation. Consumer spending has fizzled, labor market conditions have worsened, and manufacturing activity is treading water, the report said. Economic growth is expected to have ground to a halt if not receded in the first three months of 2008.
As a result, the odds of the Fed carrying on its aggressive rate-cutting policy seem fairly good. However, the European Central Bank seems intent on keeping inflation its main priority. Eurozone inflation jumped 1% from February to March and 3.6% from 2007. If the ECB continues to hold its rate steady at 4%, then the discrepancy between the banks' lending rates could further widen the gap between the dollar and the euro.
To Read More About the Dollar's Decline.
News and Related Story Links:
- International Herald Tribune:
Inflation pushes higher in Europe and the U.S.
- International Herald Tribune:
U.S. sonsumer prices rise slightly in March
- Money Morning:
BOE Cuts Rate, ECB Holds Steady