- The Washington Times - Wednesday, June 18, 2008

Wholesale prices barreled ahead while housing and industrial activity faltered - a blend of high costs and slow growth that ensures the Federal Reserve‘s likely move on interest rates next week will be no move whatsoever.

There’s some Catch-22 for the Fed in all of this, and Chairman Ben S. Bernanke and his colleagues have made it increasingly clear they are not inclined to cut interest rates further for fear of aggravating inflation. On the other hand, if they act too quickly at the June 24-25 meeting to boost rates to fend off inflation, it would hurt an economy already battered by housing, credit and financial woes.

“The Fed is in a box,” Ken Mayland, president of ClearView Economics, said after the latest batch of economic barometers was released Tuesday. That’s why many economists are predicting the Fed will hold rates steady at 2 percent, a four-year low, at next week’s session.

The Labor Department’s Producer Price Index (PPI), which measures the costs of goods before they reach store shelves, leaped 1.4 percent in May, the biggest increase in six months. Galloping energy and food prices, which are especially squeezing business profits, figured prominently in the index’s pickup.

The economy’s problems and high prices for fuel and raw materials are taking a toll on manufacturers and others.

The Federal Reserve reported that industrial production fell 0.2 percent in May, the second straight monthly decline. Plants operated at only a 79.4 percent capacity, the lowest since September 2005 after the Gulf Coast hurricanes. And, there was more fallout from a deeply depressed housing market.

The number of new housing projects started in May fell 3.3 percent to a 975,000 pace - the lowest in 17 years - as builders pulled back further. Builders are smarting as unsold homes as well as foreclosed homes pile up, adding to an already-swollen supply. Sagging demand from would-be buyers and, more recently, rising mortgage rates, are adding to builder headaches.

The Fed and the Bush administration are hoping the central bank’s powerful rate cuts since last September - which take months to work through the economy - along with the government’s $168 billion stimulus effort, will help lift the country out of its doldrums. It’s a gamble, though, as expensive food and gas could force people and businesses to hunker down even further.

Yet another report Tuesday showed that the country’s “current account” deficit, which is the broadest measure of trade, widened to $176.4 billion in the first quarter, up from $167.2 billion in the final quarter of last year, as the U.S.’ foreign-oil bill soared.

The current account report covers not only goods and services but also investment flows between the United States and other countries.

When energy and food costs were excluded in the PPI report, the so-called “core” prices rose a much more modest 0.2 percent in May, an improvement from April’s 0.4 percent increase. That suggests other prices were more tempered.

Still, there are growing concerns that rising energy and food costs will eventually force companies to boost prices for lots of other goods and services, spreading inflation through the economy. That’s why Wall Street investors predict the Fed will be forced to boost rates later this year to combat inflation. Others, however, think the Fed won’t have to begin raising rates until next year.

Over the past year, overall producer prices have gone up 7.2 percent, while “core” prices have increased 3 percent.

Energy prices were up 4.9 percent in May, the most since November. Diesel fuel prices jumped 11.2 percent, gasoline prices rose 9.3 percent and home heating oil increased 8 percent. Food prices went up a sharp 0.8 percent, the most since March.

Soaring energy and food prices, which have wracked up a string of record highs in recent days, are walloping consumers and businesses alike. Energy prices eased a bit Tuesday, with oil hovering around $134.19 a barrel and gas prices at $4.078 a gallon.

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