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With prices up, interest rates likely to stay put

Hillary Wicai Mar 16, 2007

KAI RYSSDAL: Data point number one this week was probably Tuesday, when subprime mortgage lenders got Wall Street in a mess of trouble. Yesterday it was inflation at the wholesale level. Almost double what experts had been expecting. This morning it was inflation for you and me. The consumer price index rose four-tenths percent last month. That’s double January’s increase, and probably puts the last nail in the coffin for hopes of a Fed rate cut at Tuesday’s meeting. Marketplace’s Hillary Wicai has more now from Washington.

HILLARY WICAI: A higher CPI. Blame rising energy and food costs. Thanks to this harsh winter’s effect on citrus crops, the cost of fresh fruit alone jumped more than it has in 18.5 years.

David Wyss is the chief economist at Standard and Poors. He says based on yesterday’s much larger than expected increase in producer prices, we can continue to expect higher consumer prices like we’re seeing in today’s report.

DAVID WYSS: In the case of fruits and veggies, it gets passed on fairly quickly. The same in the case of gasoline. But in the case for example of meat, which has also gone up very sharply at the producer level, it can take a little while. Because you got to slaughter the cow, you gotta package it and then you gotta ship it off to the grocery store. The meat prices may take a while before they actually show up at the consumer level.

So we’ve got that to look forward to. And the Federal Reserve is stuck.

Peter Morici is a professor of economics at the University of Maryland. He predicts the Fed will leave interest rates unchanged when they meet next week — mostly because, he says, there’s not much the Fed can do.

PETER MORICI: Quite simply, the economy is already slowing because of the subprime problems and the broader problems in the housing market. If it raises rates, it risks a recession. If it lowers rates, it risks inflation.

Since February of last year, core consumer prices are up 2.7 percent. That’s well above the Fed chairman’s target range of 1 to 2 percent. Morici predicts relief from this inflation may take a few months.

In Washington, I’m Hillary Wicai for Marketplace.

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