- The Washington Times - Tuesday, May 16, 2006

ASSOCIATED PRESS

Galloping energy prices, hotter industrial production and cooler housing activity are creating a mixed economic picture for Federal Reserve policy-makers to ponder.

The latest batch of economic reports released yesterday underscored the difficult crosscurrents Fed policy-makers must wade through in charting the course of interest rates.

A Labor Department report showed wholesale prices jumped by 0.9 percent in April, the most in seven months. The main culprit behind the rise: soaring costs for gasoline and other energy products.

Most other prices, though, were well-behaved. “Core” prices — those excluding energy and food costs — that are closely watched by the Fed edged up by just 0.1 percent for the second month in a row. That suggested the spike in energy prices hasn’t affected the price tags on lots of other products.

Global competition is forcing some U.S. companies to absorb higher prices for energy and raw materials out of their profits rather than through boosting customers’ prices, said Kenneth Beauchemin, economist at Global Insight.

For the 12 months ending in April, core prices were up 1.5 percent — a much tamer showing than the 4 percent rise in wholesale prices overall over the same period.

A Commerce Department report, meanwhile, provided further evidence that the housing market — which rang up record-high sales for five years running — is losing momentum.

The number of new housing projects that builders launched in April dropped by 7.4 percent to a seasonally adjusted annual rate of 1.849 million units, the lowest level in 17 months.

A third report from the Federal Reserve showed industrial activity bounded ahead last month. Production at the nation’s factories, mines and utilities rose by 0.8 percent in April, the most since December.

The report suggested that industrial activity was brisk, even as producers have to cope with higher prices for energy and other raw materials.

The Fed report also showed that the proportion of industrial capacity in use climbed in April to 81.9 percent, the highest since July 2000. Economists look at this figure for clues about future inflation.

For instance, if plants were running at full tilt and couldn’t crank out enough goods to satisfy customers’ demands, that could drive prices up. For now the figure isn’t overly worrisome, but it bears close watching, analysts said.

The trio of reports gave the Fed much to sort through.

The wholesale price report suggested surging energy prices are not yet sparking broader inflation through the economy. The housing cool-down is expected to lead to slower overall economic activity, which would reduce inflation pressures.

By themselves those two reports could make the Fed feel more comfortable about taking a break in its rate-raising campaign, analysts said.

But the industrial production report, by itself, would hold the door open to another rate increase, analysts observed.

“All these crosscurrents leave the Fed in a very difficult situation,” said Mark Zandi, chief economist at Moody’s Economy.com.

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