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Forecasting a High-Pressure System Ahead

It's hard to believe the market would react well to increases further down the price pipeline.

Up and Coming

JACKSON HOLE, Wyo. -- Will the July

retail sales

numbers to be released tomorrow and/or the July

producer price index

to be released Friday make our central bankers happy?


Recall this key nugget from



delivered last month.

The already shrunken pool of job-seekers and considerable strength of aggregate demand suggest that the Federal Reserve will need to be especially alert to inflation risks. Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat. That would engender inflationary pressures and put the sustainability of this unprecedented period of remarkable growth in jeopardy. One indication that inflation risks were rising would be a tendency for labor markets to tighten further. But the FOMC also needs to continue to assess whether the existing degree of pressure in these markets is consistent with sustaining our low-inflation environment. If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later -- one that could impair the expansion and bring into question whether the many gains already made can be sustained.

Say the July retail sales report prints pretty much as expected -- about 0.4% both overall and core (excluding autos). More important still, say that sales excluding building materials, gasoline and autos -- this series, called retail control spending, is used to produce the

personal consumption expenditure

numbers that show up in the

gross domestic product

report -- post an increase a little north of that. Finally, assume (conservatively) that all of the retail series post just trend increases in both August and September -- and, owing to the quick pace at which

income has recently accelerated, that is a conservative assumption indeed.

Under that scenario, retail control spending would end up turning in a 7.2% third-quarter increase.

Compare that with a 7.0% second-quarter gain.

And with an average 5.0% quarterly increase during the 1996-1998 period.

And then glance back at the G. Love nugget above -- especially the "demand growth persist or strengthen" part.

And then

recall the "ongoing strength in demand in excess of productivity gains" thing.


To the producer price indices.

The market is looking for the finished goods index to post a 0.3% increase and for its core (excluding food and energy) counterpart to turn in a 0.1% gain.

Some of the better forecasters see upside risk.

The seers at


are looking for a 0.4% headline print. Kathy Jones at


is looking for an even bigger one. Mike Niemira at


joins them in calling for the core finished goods to print twice as big as the market expects.

Increases further down the price pipeline stand to pose a bigger threat. The forecasters at

Salomon Smith Barney

reckon that the core intermediate goods index, which bottomed at the beginning of the year, will rise by half a percentage point to extend a string of increases (five) not seen in 2 1/2 years. They also estimate that the core crude goods index, which bottomed at the end of last year, will rise by more than 2 full percentage points

And it's real tough to believe that the market would take kindly to that.

Langston Does Policy

We end with another G. Love nugget.

Subdued inflation, of course, has resulted, in part, from the sharp fall in oil prices from mid-1997 through early this year. Moreover, there has been a significant weakening in nonoil import prices since 1995, owing largely to a combination of declining world commodity prices and a strengthening dollar in our foreign exchange markets through last summer. The decline in prices of oil and nonoil imports are clearly "one-off" events.

And so one wonders.

What happens to a price pressure deferred?

Side Dish

What the hell is going on around here?

Trying to do way too much.

I do not know. And I do not care.

Too many Twinkies. Not enough meat.

Not dancing with the one who brung ya.

Just shut up and do your job.