–Price Measures Could Signal Beginning of End of Food, Energy Spike

By Chris Cermak

WASHINGTON (MNI) – Consumer and producer price increases in the
U.S. likely decelerated or even stalled in May, brought on by weaker
commodity prices that could ease some pressure on the Federal Reserve to
start tightening monetary policy.

PPI due out Tuesday is forecast to rise 0.1%, which would be the
smallest increase since September 2010, while CPI on Wednesday is
projected to be flat for the first time since June of last year,
according to economists surveyed by Market News International.

The weaker headline numbers would signal the beginning of the end
of a food and energy price surge that has reduced consumers’ purchasing
power over the last few months. Retail gasoline prices appeared to peak,
at least for now, at $3.965 in the week of May 9, according to the
Energy Information Administration.

Jonathan Basile, an economist with Credit Suisse, says lower
commodities could push headline numbers into negative territory going
forward.

“That’s more of a June story,” Basile told MNI in an interview.
“The gains (in May) are not as great. The June story is we might see an
outright decline.”

The dollar also strengthened against the euro and other currencies
in May, pushing down the costs of imports. Petroleum import prices fell
0.4% and food imports dropped 0.5%, according to May figures released
last week.

Core prices that exclude food and energy are likely to remain
relatively steady, with core PPI and CPI expected to rise 0.2%,
according to the MNI survey.

But Basile predicts there could be a more noticeable increase
coming from rising auto prices, the result of supply shortages brought
on by the Japanese earthquake.

“The whole auto complex … are getting a boost over this period
because of these model shortages,” Basile says.

Some more hawkish Fed officials had cited the recent uptick in
headline inflation as a reason to start pulling back from the central
bank’s easy monetary policy, as its second round of quantitative easing
comes to an end this month.

A weaker inflation report for May could bolster the case of Fed
Chairman Ben Bernanke and the Fed’s senior officials, who believe the
Fed’s monetary policy remains appropriate, voiced concerns about the
weak pace of the economic recovery and have said the rising inflation
was “transitory.”

“Inflation has drifted up earlier in the year, but has come down in
recent weeks,” New York Fed President Bill Dudley said last week.

Assuming the rapid buildup in commodities has ended, Dudley said he
“would expect headline inflation to decline to a level closer to our
longer-run objectives.”

PPI will be released at 8:30 a.m. ET Tuesday and CPI will be
released 8:30 a.m. ET Wednesday by the Labor Department.

— Chris Cermak is a reporter with Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

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