NEWS

Expert: Producer Price Index/Consumer Price Index Differential Indicates Serious Inflation Problem

DURHAM, N.C., March 23 (AScribe Newswire) -- Today's Consumer Price Index increase of 0.4 percent and yesterday's Producer Price Index increase of 0.4 percent may point to future economic problems, according to Duke University professor Campbell R. Harvey.

       "I believe we have a more serious inflation problem than is widely acknowledged in the market," says Harvey.

       The Producer Price Index (PPI), an indicator of wholesale prices, has been running above the Consumer Price Index (CPI) since March 2003.

       "This is ominous," Harvey said. "On a year-over-year basis, the PPI exceeded the CPI in 2000, 1989, 1978 and the last half of 1972. When this happened over a sustained period, a recession has followed."

       "The economic story is straightforward. The PPI is an advance indicator of consumer price inflation. It takes a while for the prices of production goods to work their way through the system and into consumer prices. The high PPI indicates substantially higher consumer price inflation in the future," Harvey said.

       Harvey also sees potential for economic difficulties if interest rates continue to rise.

       "It is obvious that Federal Reserve Chairman Alan Greenspan has been frustrated that seven consecutive boosts in the short-term rates have had little impact on long-term rates," Harvey said. "What they really want is for the longer-term rates to increase, and that has not happened."

       Yesterday's boost in short-term rates to 2.75 percent brings the interest rates to the level viewed by many of America's chief financial officers as the balancing point for growth and inflation, according to the Duke University/CFO Magazine Business Outlook Survey.

       In the March 2005 survey, which included 293 American CFOs, 35 percent cited a Fed Funds rate of 3 percent as the highest level the rate can reach without doing damage to the economy.

       "What is disturbing is that the market expects the rate to increase to close to 4 percent by the end of the year. This would be well into the damage zone for the economy," Harvey said.
 

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