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CNN Today

Wholesale Prices Jump, Reviving Fears of 'Stagflation'

Aired February 16, 2001 - 1:01 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LOU WATERS, CNN ANCHOR: In the 1970s, it was called stagflation: rising prices with rising unemployment. It was a difficult time for many Americans.

And today, a new government report is reviving those old memories. The producer price index, PPI, jumped a surprising 1.1 percent in January. That's the biggest one-month increase in wholesale prices in more than 10 years. Soaring natural gas bills, of course, led the way, but there also were price increases for tobacco, electricity, cars, food.

Besides being a warning of possible inflation, the report raises questions about whether the Federal Reserve can continue cutting interest rates to fend off a recession.

Myron Kandel of CNN Financial News joins us from New York, as he usually does when we have these complicated stories.

Mike, we have James Glassman, a senior U.S. economist at JP Morgan Chase, telling CNN earlier today, this is really not an inflation story. What is this story?

MYRON KANDEL, CNN FINANCIAL EDITOR: Lou, I got to tell you something, that this figure took Wall Street by surprise. The consensus of economists was a 0.3 percent jump in the wholesale price index. And so 1.1 percent really knocked the socks off.

Now the question is, is it a statistical aberration? Is it something that's now feeding into the economy, or is it a one-time thing that may even be revised by the time the figures are out next week. And that -- next month, rather. That, of course, we don't know.

But the Fed, I think, the big question is, will this keep the Fed from cutting rates some more? Everybody on Wall Street is expecting more cuts by the Fed, perhaps even before its next official meeting on March 20. This may give it a pause to think about whether inflation is rearing its ugly head.

But a lot of wise people on Wall Street are saying, don't get panicky over this one-time increase because it may not be that significant. And as you showed on the screen, there were some major jumps. Natural gas prices really took a leap. We know about the problem -- the energy problem, particularly out in the West, but other matters like tobacco and cars.

Now, don't forget, those prices went up, but they don't go up every month. And the thing -- and the feeling is that if you factored out tobacco and cars, the core rate of the PPI, which was up 0.7 percent -- the core rate, meaning without food and energy. So -- but without cars and tobacco, that rate would have been up only 0.3 percent, much more moderate.

So, any rate, it was a startling figure, but it's really a figure that needs some examination between the lines, Lou.

WATERS: We had another economic jump, too, Mike, in January, housing starts up 5.3 percent. Factor that into the picture you're developing here.

KANDEL: Well, the housing sector has been a strong spot as the economy has slowed down. And that's encouraging people to think that we aren't in for a recession, that we aren't in for a hard landing, perhaps a soft landing, because housing is really an important part of the economy. People buy houses; they also have to furnish them. So that really spills throughout the whole economy and gives it some strength. So that's a bright spot in the picture.

And the doomsayers are saying, oh, well, you got higher prices, you got housing being very strong. That will really give the Fed opportunity to pause. But so far, the feeling I'm getting on Wall Street is, don't get too alarmed by this inflation figure. And housing can warm our hearts, Lou.

WATERS: All right, and we know how we love to have our hearts warmed. Myron Kandel in New York.

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