Federal Reserve & Interest Rates

Yesterday the Labor Department released  it’s Consumer Price Index numbers for July which were higher than economists  had forecast.

On a seasonally adjusted basis, the CPI-U advanced 0.8 percent in July, following a 1.1 percent increase in June.  The index for energy rose sharply for the third straight month, increasing 4.0 percent in July and accounting for about half of the overall increase in the all items index.

The food index rose 0.9 percent in July after rising 0.8 percent in June.  The index for all items less food and energy increased 0.3 percent in July, the second straight such increase.

The previous three months saw energy prices rise significantly, 4.4% in May and 6.6% in June to go along with the 4% from last month.  However, in the second half of July the price of oil started to fall with other commodities following soon after.

Unless oil starts to rise sharply again in the last half of August, next month’s index for energy should fall considerably.  One things for sure, there are a lot of people at the Fed breathing a little easier these days.

Global economies are growing weaker, which has spurred demand for the dollar.  That’s been the main impetus for the recent sell off in commodities.

The U.S. economy is also still very weak though, especially the housing and credit markets.  However, there isn’t that great fear anymore of the kind of stagflation we saw back in the 70’s.

Much has been said about how the U.S. is further along the economic cycle than the rest of the world but I guess that just means we’re a little closer to the bottom than everybody else.

On Thursday, the Department of Labor released it’s report for the Consumer Price Index(CPI) which showed a large spike in commodity prices in May.  After energy prices remained stable in April, they rose sharply last month causing a 0.6% rise in the CPI, the largest since November.

The 4.4% rise in energy prices is becoming a major concern for many officials at the Fed, while Chairman Bernanke maintains that he believes inflation growth will slow due to the softening economy.  While core inflation remain relatively low at 0.2%, which was what economists were predicting, it is doubtful energy demand will decrease in the near future with the summer driving season now upon us.

Many analysts are predicting $150 a barrel price for oil before the summer is over.  The G-8 finance ministers are now calling rising energy prices the biggest threat to global economic growth, surpassing credit concerns which have plagued the world for the past year.

Many consumers are already worried about the high price of gas but it still has a ways to go before it matches the relative increase in the cost of oil, which has more than doubled in the past year.  It is becoming apparent that rising commodity prices are beginning to have a significant impact on the standard of living for many Americans.

The Fed would prefer to keep rates stable for as long as possible with signs that the housing market continues to worsen, which is causing growing losses in the financial sector.  If other central banks raise rates in the mean time to combat inflation, we could see energy prices climb even higher as the dollar takes another pounding.

Relief in energy prices is not expected to arrive until September when most investors are predicting the Fed will most likely raise rates.  With unemployment surging last month as well it is becoming increasingly difficult for the Fed to keep the economy out of a recession.