Friday, September 15

Oil prices may be what's needed for a soft landing'

By BARRIE McKENNA Globe and Mail Update

Washington  Consumer prices fell in the United States for the first time in 14 years last month in another sign that sky-high oil prices may be just what's needed to ensure a soft landing for the world's largest economy.

Oil prices surged to a new 10-year high yesterday, hitting $36 (U.S.) a barrel before settling at $35.92, up $1.85.

Rather than fuelling inflation, high energy costs appear to be acting as a brake on the booming U.S. economy, economists said yesterday in the wake of a 0.1-per-cent drop in the August U.S. consumer price index.

"It looks like what we are getting is a soft landing," said Gordon Richards, senior economist at the National Association of Manufacturers in Washington. "Energy price increases are acting like a tax and causing people to slow down their spending."

Central bankers in Canada and the United States are unlikely to raise interest rates again soon as long as inflation is controlled.

The U.S. Federal Reserve Board boosted interest rates six times since June, 1999, in a bid to put the U.S. economy on a more sustainable growth path. The August CPI report, combined with recent evidence of slowing auto and home sales, suggest the strategy is working.

Nonetheless, economists cautioned that the August CPI data, published yesterday by the U.S. Department of Labor, marked a bit of an aberration. The fall was paced by a brief reversal in gasoline prices and lower transportation costs.

Those decreases were more than enough to counter higher prices for clothing, housing, medical care and education between July and August.

Excluding notoriously volatile food and energy prices, the so- called "core" inflation rate rose 0.2 per cent between July and August. That is in line with the trend of the past few months.

"If you go to the average Ameri- can and tell them energy prices declined in the month of August, you would think there was perhaps something loose upstairs," John Lonski, chief economist at Moody's Investors Service Inc. in New York, told Reuters Television.

Indeed, U.S. energy prices are 13.4 per cent higher than they were a year ago and gasoline prices are up 19 per cent.

And since the end of August, world oil prices have resumed their upward climb. Yesterday's close of $35.92 for crude for delivery in October surpassed the previous 10-year high of $35.85 set earlier in the week.

The rising oil price in turn has led to a runup in prices for natural gas, gasoline and home heating fuel.

Yet, many economists suggested that even a month of lower inflation is likely to keep the Fed from raising interest rates again when it meets Oct. 3, and possibly for the rest of the year.

U.S. central bankers seemed almost relieved that inflation is in check and the economy is cooling. Fed vice-chairman Roger Ferguson said yesterday that the drop in U.S. consumer prices suggests the "spillover" effect from high oil prices "still seems to be quite contained."

He added that the long-term inflation trend remains relatively tame. But he said the Fed would continue to closely monitor the situation.

"The core inflation numbers remain quite good  and that keeps the Fed on the sidelines," said Jeff Palma, an economist at UBS Warburg in Stamford, Conn.

Economists warned, however, that it may take some time for the impact of higher energy costs to ripple through the economy. Exceedingly low supplies of many fossil fuels have triggered fears of even higher prices ahead.

In recent weeks, President Bill Clinton has warned that skyrocketing oil prices could eventually trigger a global recession.

But speaking to reporters yesterday at the White House, Mr. Clinton seemed to play down those fears.

"I think in the short to medium term, the answer . . . is no," he said when asked if high oil prices might lead to recession.

Crude oil prices have more than tripled since December, 1998, leading to widespread protests in Europe. On Monday, the Organization of Petroleum Exporting Countries said it would boost output.

Also yesterday, the Fed reported that U.S. factory production put in its worst two months since December, 1998. Factory production rose 0.1 per cent last month, the same rate as in July, according to the report.

Overall industrial output, which also includes mines and power plants, rose 0.3 per cent in August.

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-- Martin Thompson (mthom1927@aol.com), September 16, 2000