PRODUCER PRICES
Inflation in focus
As Federal Reserve Chairman Alan Greenspan continues to hold rates at a 40-year low, some are demanding that the central bank reverse course. They argue that the current barometer for short-term lending, at 1.75 percent, stands below the rate at which prices are rising.
It’s true that most measures of inflation see it pushing ahead somewhere around 2.5 percent. Much of the blame, however, falls on oligarchs in the turmoil-plagued Middle East, home of much of the globe’s petroleum.
As for Greenspan, he warned last week that “inflation comes upon you by stealth.” Does that mean a rate increase is lurking?
Part of the answer may appear Thursday, with the May wholesale inflation report, or producer price index. Chicago economist Robert Dederick is looking for a modest rise of 0.1 percent, in view of softer oil prices.
“The Fed remains much more focused on the vigor of the economic recovery, which remains in its infancy, than on worries about inflation, which are somewhere down the road,” said Dederick, a consultant to Northern Trust Corp.
He said costs remain subdued, especially at the wholesale level, because commodity prices are docile. In addition, domestic manufacturers are stuck with excess capacity, while foreign producers have yet to raise prices in response to a weakening dollar.
“If you want to look for trouble on inflation, you will find it in the service sector,” Dederick said. “But for the Fed, this is not a problem that is near at hand.”
BEIGE BOOK
Grist for the Fed
Further assessments of price pressures will take place Wednesday, with publication of the Fed’s beige book, a region-by-region look at the economy. The report will serve as grist for policy-makers who will discuss interest rates June 25-26.
In addition, members of the Fed will carefully monitor Thursday’s May retail sales.
Chicago economist Peter Glassman is expecting a drop of 0.4 percent, adding that “much of the blame goes to auto sales, which were very weak.” Contrarily, said Glassman, of Bank One Corp., durable items for the home were quite strong.
Detroit’s sales were unusually tepid, struggling to the lowest levels since the end of 2000, as dealer freebies expired. Glassman said dealers are ending some low-cost loans but bringing back conventional rebates.
Overall, Glassman said he looks for consumers to take a slight buying pause over the next month or two, but for retail sales to pick up substantially in the second half of this year.
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MANUFACTURING
On a roll
Two measures of the manufacturing sector, May industrial production and capacity utilization, will be issued Friday, with analysts expecting signs that factories are on a roll.
Following last week’s survey results from the nation’s purchasing managers, which came in stronger than expected, economist Ian Shepherdson said industrial activity is consistent with an economy expanding at a 4.5 percent annual rate. But Shepherdson, of High Frequency Economics, Valhalla, N.Y., said some doubts remain about whether the hum of activity relates primarily to restocking bare shelves, or to fresh business investment.
Equities
More gloom
For the stock market, each day seems to bring renewed nervousness over corporate accounting sleight-of-hand. Yet many of the practices prompting the wave of finger-pointing would barely have elicited yawns a few months ago.
Last week, prices on Wall Street sank to an eight-month low. At this point, the question is what will be needed to dispel a general gloom.
Chicago investment manager William Hummer says it may take a dramatic event, something along the lines of the Battle of Midway in World War II, to make the world realize that Americans are united.
“Congress, in particular, must begin to show a spirit of cooperation and support, after a period in which clear focus at the highest levels has been lacking,” said Hummer, of Wayne Hummer Investments.