Less Reason To Fear U.S. Deflation

By John S. McClenahen Although the U.S. Labor Department's Producer Price Index declined 0.3% in May, the decrease was nothing like the record monthly decline of 1.9% in April. And that should ease some of the continuing concern among manufacturing executives about deflation getting an anti-growth grip on the U.S. economy. Maury Harris, chief U.S. economist at UBS Warburg, New York, notes that the year-to-year change in the so-called core PPI -- the finished goods index minus energy and food -- remains close to zero. "No evidence here of a revival in inflation," Harris stresses. "Moreover, earlier strengthening in core crude and intermediate prices has petered out," he states. Thus, the interest-rate setting Federal Open Market Committee (FOMC) , slated to meet at month's end, "has much latitude to buy insurance for recovery by easing [the federal funds rate, now at 1.25%] -- and at the same time add to [FOMC Chairman Alan Greenspan's] firebreak against deflation," says Harris.

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