- The Washington Times - Friday, April 21, 2006

What a difference 18 and a half hours make. At 2 p.m. on Tuesday, the Federal Reserve Board released the minutes of its March meeting. Analysts and markets immediately interpreted the information to mean that the Fed intended to stop raising short-term interest rates after its meeting in May, when its targeted overnight interest rate is expected to be lifted another quarter point to 5 percent. Literally within a few minutes of the Fed’s release, the Dow jumped 60 points, topping off a daylong rally that saw the Dow rise by nearly 200 points.

According to the conventional wisdom, the Fed had concluded that inflationary pressures were well-contained after 15 consecutive quarter-point increases. We admit to being confounded by the conventional wisdom. And if the Fed really had concluded that inflationary pressures were sufficiently well-contained that it could end its tightening cycle after its next meeting, then we admit to being confused by that as well.

After all, 30 minutes after the Fed released its minutes (and 25 minutes after the Dow jumped 60 points), the price of oil on the New York Mercantile Exchange closed at a record-high of $73.09 per barrel. Then, at 8:30 a.m. Wednesday, 18 and a half hours after the Fed released its minutes, the Department of Labor reported that core consumer inflation, which excludes the volatile energy and food sectors, had increased by 0.3 percent in March, its biggest monthly jump in a year. That number strongly suggested that energy inflation was being more substantively “passed through” to other products, a potentially problematic development that the Fed has rightly feared.

Over the past 12 months, core consumer prices have increased by a less-worrisome 2.1 percent. But that figure is misleading. For the April-September period, core consumer prices rose at an annual rate of 1.5 percent. For the October-March period, the annual rate of core consumer price inflation has accelerated to a much more worrisome 2.7 percent. Together, these two annualized rates average out to the more benign 2.1 percent for the year.

With core consumer prices rising at an annual rate of nearly 3 percent over the last two quarters and daily oil prices leapfrogging from one nominal record level to the next, now is not the time for the Fed or the markets to become complacent about inflationary pressures.

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