Bitter Cold Gives Temporary Boost to Consumer Prices

HOW cold was it last month? Cold enough to take out a loan to pay your fuel bill. Cold enough to make rock salt more valuable than some hot stock on Wall Street. And certainly cold enough to make the Consumer Price Index (CPI) rise at its fastest pace since November.

To hardly anyone's surprise, the government announced yesterday that the cost of keeping a house warm helped raise consumer prices by 0.3 percent in February. However, food prices actually fell by 0.3 percent, offsetting some of the energy hike.

It is not likely the spike in consumer energy prices will carry over to next month's CPI since fuel oil prices have dropped significantly now that March temperatures are returning to normal. ``In March we should see energy prices declining,'' says Ram Bhagavatula, an economist at Citibank in New York.

Inflation not a problem

Analysts point out the CPI numbers indicate that inflation still is not a problem even with the economy chugging ahead at about a 4.5 percent rate in the first quarter. ``In that respect it is probably reassuring to the financial markets since it shows us that even though the economy is still showing signs of improvement, there are no signs of inflation in one of the measures,'' says William Sullivan, a senior vice president at Dean Witter Reynolds.

However, Mr. Sullivan says it is doubtful that the Federal Reserve Board will be impressed by the CPI numbers since the Fed views such statistics as lagging indicators. Instead, Sullivan says the Fed is focussing on such leading indicators as capacity utilization and futures prices on the commodity markets. ``In those measures, if anything there has been a deterioration,'' warns Sullivan.

The CPI news followed a rise of 0.5 percent in the February Producer Price Index (PPI). The jump, reported on Tuesday, was mainly the result of a rise in energy prices which have dropped sharply in the beginning of March. The biggest wholesale price rise is taking place in materials sensitive to the business cycle. Thus prices have risen for crude materials such as copper and nickel. These raw materials prices are up 10.2 percent over last year. However, as Bruce Steinberg of Merrill Lynch & Co. notes, ``prices for many of those commodities have been extraordinarily depressed.'' And, as Mr. Steinberg notes, so far there is no evidence price increases in these materials is filtering through to finished goods.The core PPI, excluding food and energy, was up only 0.1 percent for the month. This was better than many economists expected. In addition, unit labor costs are declining, actually down 1 percent from last year.

Part of the inflationary rise in January was due to weather. ``The severe snowstorms meant that manufacturers could not get product shipped out to customers - that had a lot to do with why prices looked stronger,'' says Arnold Moskowitz, head of Moskowitz Capital Consulting, money managers and consultants.

Fed expected to raise rates

Despite the positive inflation news, some economists still expect the Federal Reserve Board to raise interest rates by a quarter of a percent in April. The catalyst, says Chicago-based economist David Hale of Kemper Financial Securities, will be the March unemployment rate, due out on April 1. Mr. Hale expects the economy will have created 250,000 new jobs. ``That will get the Fed moving,'' he says.

Alan Greenspan, the chairman of the Fed, has also indicated he is interested in restoring some positive real rate of return on the Federal Funds rate, the interest rate that bank's lend each other on overnight funds. In a growing economy, Fed funds have historically been 1 to 2 percent above the inflation rate, Mr. Bhagavatula says. If core inflation is now at 3.5 percent, then Fed funds should be 4.5 to 5 percent instead of the 3.25 percent rate today. ``This is really the bigger issue in 1994,'' Bhagavatula says.

If interest rates do start moving up, Mr. Moskowitz believes they will slow the economy down by mid-year as consumers slow their purchases of housing and autos. ``Inflation will start to come down,'' Moskowitz says.