Prices Soar!

The federal government in releases yesterday and today gave initial indications of how the economy did in March. The picture was subdued as the government concentrated on the “good news” that “core” inflation was only growing at a 0.2% rate for the month or an annual rate of 2.4%. This is considered to be within the government’s targeted rate for “core” inflation. The “core” rate does not include food increases or the rise in fuel costs. For March, energy prices were up 2.9%, the biggest increase since November. Even this percentage seems out of line since they also report that heating oil was up 13.1% and diesel fuel, used by truckers to get your goods to the local store, was up 15.3%. Food prices for the month were up 1.2% (this would be 14.4% annualized), reflecting the increases in cost for vegetables, rice and beef. Anyone going to the grocery store or buying gas for their car is seeing the jump in prices on almost a daily basis. The question that must be asked is: will this lead to a jump in longer term inflation or is it simply a factor of the cost of oil as it passes thru the various parts of our economy? We also must remember that as the value of the dollar has been going down, against other world currencies, the cost of oil is bound to go up in dollar terms. The Federal Reserve Board (Fed) which has been lowering the Fed discount rate to stimulate the economy must now consider how big a problem inflation is and where it might be going in the future. The lower discount rate also has a negative impact on the value of the dollar in world markets. The former head of the Fed believed that fighting inflation was job one for the Fed. Thus far it appears the new chairman has been more concerned with the economy than inflation. At the last meeting we saw the first decent in many years with some Fed members beginning to question the sharp reduction in interest rates as inflation seems to be accelerating. Raising the Fed discount rate tends to slow or moderate the inflation rate. Will the rate be lowered (help the economy), left the same (no clear decision) or raised (moderate inflation and perhaps help the dollar)?