Sun, Jun 27, 2004 - Page 11 News List

Inflation squeezes US economy

THE FED'S ARCH-FOE Analysts said inflationary pressures were greater than expected, and this was the reason growth slowed to 3.9 percent in the first quarter


The US economy expanded at an annual pace of 3.9 percent in the first quarter of the year, sharply slower than earlier thought, new government data showed Friday.

Inflationary pressures were greater than had been believed, the Department of Commerce said.

Nevertheless, analysts said, the economy appeared strong enough to withstand a new era of rising interest rates to be ushered in next week by the Federal Reserve.

US economic growth braked from a 4.1-percent pace in the last quarter of last year, revised Commerce Department figures showed.

Previously, the data showed an acceleration to 4.4 percent growth.

"It was a little weaker than expected but nothing too serious," said BMO Financial Group senior economist Sal Guatieri.

"There still appears to be a lot of underlying strength in domestic demand," Guatieri said.

The news was released shortly before Federal Reserve chairman Alan Greenspan and fellow policymakers meet to raise key short-term rates for the first time in four years.

The Federal Open Market Committee is near certain to raise the federal funds target rate by a quarter of a percentage point, to 1.25 percent, when its next two-day meeting ends Wednesday.

Super-low interest rates have helped the economy shake off a series of shocks from the September 11 attacks to the Iraq war, stimulating activity in key areas of housing and big-ticket purchases such as cars.

Latest data Friday showed housing still sizzling.

Existing home sales leapt 2.6 percent from the previous month to a record seasonally adjusted annual rate of 6.80 million in May as people rushed to buy before rates go up, the National Association of Realtors (NAR) said.

Sales were up 15.8 percent from a year earlier.

"Fundamentals are still very favorable for a vibrant market," said association chief economist David Lereah.

"In part, the record results from a natural `fence-jumping' by buyers getting into the market after mortgage interest rates began to rise at a sharper clip in April," he said.

"This may be the last peak in home sales for a while and existing-home sales are likely to be slower during the second half of the year. Even so, they will remain at strong levels and 2004 is on track to be a record."

On Thursday, government figures showed sales of new homes also hit a record last month, jumping by an 11-year record of 14.8 percent to hit an unprecedented annual rate of 1.37 million.

New home sales were up 25.3 percent from a year earlier.

The revised economic growth report showed inflationary pressures -- the arch foe of the Federal Reserve -- gaining strength.

A measure of prices paid by consumers -- the so-called personal consumption expenditure index -- rose 3.2 percent in the quarter.

That was barely faster than the 3.1 percent increase in prices earlier estimated, but sharply up from the 1.0 percent consumer price inflation in the previous quarter.

Stripping out food and energy, core prices paid by consumers rose 2.0 percent, compared with an increase of 1.2 percent in the previous quarter.

"It reinforces the expectations of a hike by the Fed," said Moody's Investors Service chief US economist John Lonski.

The Federal Reserve would keep on raising rates until monetary policy was less accommodative, he said.

Among the key revisions in the latest report:

Imports, which subtract from economic output, soared 10.4 percent, much faster than the earlier estimate of 5.9 percent growth. Imports had jumped 16.4 percent in the previous quarter.

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