- The Washington Times - Thursday, February 22, 2001

A record jump in natural gas prices drove up the cost of living by 0.6 percent last month, a seeming revival of inflation that sent stocks plummeting yesterday.
The Nasdaq Composite Index, already down more than 50 percent from its high last year, fell 49 points to close at 2,270 its lowest level in nearly two years. The Dow Jones Industrial Average plunged 204 points to 10,527, its lowest close in a month.
The market rout was prompted by fears that the energy-led inflation surge seen in yesterday's report from the Labor Department on the Consumer Price Index will prevent the Federal Reserve from cutting interest rates as aggressively as it did last month, when it slashed rates by a percentage point in record time.
But many economists said that perception is wrong, since Fed Chairman Alan Greenspan has made it clear that the Fed views the steep increases in prices for natural gas and other fuels mostly as a tax on the purchasing power of consumers and businesses, rather than an inflation threat.
The surge in consumer prices in January was due almost entirely to a record 17.4 percent leap in prices for electricity and natural gas for home heating, which also pushed up housing costs, economists said, though higher costs for tobacco and health care also contributed to the problem.
"The market's worried that they've lost their best friend the Fed," said Ethan Harris, economist with Lehman Brothers in New York, who noted that most stock indexes have given back the big gains they posted after the Fed's rate cuts last month on worries that the Fed will abandon its efforts to stave off recession.
"A serious inflation run-up would be a dagger to the heart of the stock market," he said. "But I don't see this as a sign that inflation is getting worse. I think they're taking the report too seriously. The Fed is not going to be distracted by the inflation numbers and will continue to focus on growth."
In fact, alarm about the recent loss of confidence in the markets as well as another big drop in consumer confidence this month may prompt the Fed to cut rates again in the next few days, he said.
"Ultimately, what this does is accelerate the Fed's need to act," he said. "The market slipping the way it is will hurt not only consumer confidence but also business confidence. Corporate leaders will think twice about investment plans while consumers worry about their portfolio of stocks."
Consumer confidence has fallen precipitously in recent months in response to earlier stock market drops as well as a wave of corporate layoff announcements. The latest measure of consumer sentiment released by the University of Michigan on Friday was the lowest since 1993, when the economy emerged from the last recession.
"If confidence collapses, the economy will go with it," and that is why the Fed may move dramatically again before the next meeting of its rate-setting committee on March 20, Mr. Harris said.
Mr. Greenspan remembers the mistakes the Fed made in 1990, when it got "caught like a deer in headlights" because it was faced simultaneously with evidence of rising inflation and economic weakness. "The Fed knows it can only fight one war at a time, and right now the war is recession."
The Fed is not in a serious dilemma like it was in 1990, when inflation was much higher, he added. Natural gas prices already have fallen by half from the record highs near $10 per million British thermal units set last month, while most other prices remain tame.
Robert Parry, president of the Fed's San Francisco reserve bank, told the National Association of Business Economists yesterday that the Fed remains focused on reviving growth and is prepared to move swiftly if necessary.
"We have to be paying close attention to keep this expansion on track," he said. "The road immediately ahead may be rocky, given the uncertainties in the economy." While the Fed expects the economy to "bounce back," he said, it remains "vulnerable to a more severe downturn than expected."
Mr. Parry added that "it's not unusual for the Fed to react quickly and decisively," even without proof that the economy is falling into recession.
David Wyss, chief economist with Standard & Poor's DRI in New York, said yesterday's inflation report contained "nothing to get excited about."
"If you're healthy and don't smoke, there's no inflation out there. But whether the market's right or wrong is almost irrelevant," he said. "The market's just plain scared, and that means people are scared because people are the market.
"The Fed's got to pay attention to what's going on out there," he said. "Confidence is a good leading indicator of whether people are going to be spending money. When people are scared, they curl up in a little ball and don't go to the shopping mall.
"The danger is you can talk yourself into a recession," he said.
"Confidence is falling, you have press reports that the sky is falling and too many people in Washington are talking about recession" even though the big drop in confidence hasn't translated into the kind of retrenchment in consumer spending that leads to recession, he said.

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