Key week ahead for Bernanke and inflation Consumer, producer price data may be last straw for Fed By Robert Schroeder, MarketWatch Last Update: 7:00 AM ET Jun 11, 2006 7F8918A%7D&siteid=bigcharts&dist=bigcharts
WASHINGTON (MarketWatch) -- This could be a wild week. With three scheduled appearances by Federal Reserve Chairman Ben Bernanke and reports about last month's consumer and producer prices on the calendar, markets are getting braced for plenty of clues about the central bank's inflation-fighting campaign.
But with data also due out about retail sales, a key Fed dilemma will come into sharper focus this week. Namely, should the central bank keep raising rates when the economy seems to be cooling all by itself?
All eyes and ears will be on Bernanke when he makes speeches on Monday, Tuesday and Thursday. Following his market-busting comments last Monday, analysts are anxious the Fed chief may tip his hand about the bank's rate-hiking program. The Dow Jones industrials fell almost 200 points last Monday after the Fed chief said recent price increases are "unwelcome."
"He's a young chairman," said Robert Brusca of FAO Economics, "but he's been a high impact chairman." "He's already made a very strong statement," said Mark Zandi of Moody's Economy.com. "I think he's very pre-disposed to tighten" rates, Zandi said about Bernanke. Analysts are predicting that the Fed will raise rates for a 17th time, to 5.25%, at their next meeting from June 28-29. Some believe the central bank may not stop with one more increase.
The Fed will have important data to chew on this week as it makes up its mind.
The big number comes at 8:30 a.m. Eastern Wednesday, when the Labor Department puts out the CPI number for May. In April, core consumer prices rose 0.3%. In March they climbed 0.3%.
Economists are forecasting a 0.2% rise in the core rate and a 0.4% rise in overall inflation.
A 0.2% gain in the core CPI number would put the year-over-year core number to 2.3%, notes Ellen Beeson of Bank of Tokyo-Mitsubishi. The Fed is uncomfortable with any reading above 2%. "That's basically going to give the Fed the go-ahead in June," Beeson said.
Michael Gregory of BMO Nesbitt Burns agreed that even a 0.2% gain is enough to worry policymakers. "It's still a sign inflation pressure remains elevated," Gregory said.
Fed Gov. Donald Kohn, the nominee for Fed Vice Chairman, poured fuel on the fire started on Monday by Bernanke when Kohn told the Senate Banking Committee on Thursday that recent inflation data is "troubling." Some of the recent uptick in inflation expectations is due to higher energy prices, Kohn said in response to a senator's question. "But at the same time," he added, "there are some danger signs out there that we need to be quite attentive to."
Signs of a slowdown?
The trouble for the Fed is, there are more than danger signs in the air. Bernanke acknowledged a slowdown in growth last Monday. So the question for economists is: why is the Fed talking tough about inflation when the slowing economy could take care of rising prices by itself?
A further sign of a slowdown could come with the May retail sales report, scheduled for Tuesday at 8:30. Most analysts are predicting a weak 0.1% gain in overall retail sales but a more-robust climb of 0.5% when auto sales are taken out. Higher gasoline prices have taken away consumers' appetites for buying cars, analysts say.
In April, retail sales climbed 0.5%. In March they were up 0.6%. Slowing retail sales "should take the inflation pressure off," said Joel Naroff of Naroff Economic Advisors. But Naroff thinks Bernanke's talked so tough that hikes are coming at the next meeting, and beyond. "You have to assume they're prepared to do 50 or 100 [basis points]," Naroff said. "And that scares the hell out of everybody."
Producer prices
The Labor Department is also scheduled to release the producer price index for May on Tuesday at 8:30 a.m. Eastern. In April, the PPI rose 0.9%. In March it was up 0.5%.
Import price figures released Friday may help drive an increase in the PPI and spur the Fed to raise rates, noted Bank of Tokyo-Mitsubishi's Beeson.
Import prices rose 1.6% in May, the Labor Department said, as the price of imported petroleum climbed for the third straight month, by 5.2%.
"In an indirect way this report would support a Fed hike at the June meeting," Beeson said. "Import prices are the first in the pipeline to add upward pressure to inflation," she noted.
Most economists are expecting a tame 0.2% for the core PPI number. For the full number, consensus expectations are for a bigger gain, of 0.5%. Busy week for Fed-watching Markets will also have plenty of chances this week to hear from Fed policymakers.
Bernanke is scheduled to talk about bank supervision on Monday at 7:30 p.m. Eastern, at a Georgetown University event. Then on Tuesday at 11 a.m., the chairman is slated to discuss consumer issues in a conference being held at the Library of Congress. He'll take questions from the audience at both events. But it's Bernanke's Thursday speech to the Economic Club of Chicago that likely will get the most attention. In it he'll discuss energy, and take previously submitted questions from the audience.
In his June 5 remarks to the bankers' conference, Bernanke said energy price increases are largely to blame for consumer price inflation this year. Read Bernanke's remarks.
Kohn, meanwhile, speaks on Friday about inflation, monetary policy and globalization. He's scheduled to speak to an economic conference at the Federal Reserve Bank of Boston at 11 a.m. Friday.
Other data
Though the markets will focus on the inflation figures this week, there's a slew of other data that's scheduled.
On Tuesday, business inventories for April are set to come out at 10 a.m. Eastern. Reports about jobless claims, industrial production and manufacturing in the New York area are all due Thursday morning. Industrial production probably registered an advance of about 0.2% in May, Bank of America analysts predict. That's down from a 0.8% gain in April. Robert Schroeder is a reporter for MarketWatch in Washington.
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