The inflation bogeyman has returned, at least for a brief visit. Consumer prices rose more than expected last month, sending a shiver through bank stocks and bond prices.
"It wasn't good," said Edward Yardeni, chief economist at C.J. Lawrence/Deutsche Bank Securities Corp., New York.
The U.S. Labor Department reported Friday that the April consumer price index rose 0.4%, both on an overall basis and in the more important "core rate" of inflation that excludes volatile food and energy prices.
Wall Street had been expecting a 0.3% increase in the closely watched indicator. The March index had risen a slight 0.2% overall and 0.3% in the core rate.
Mr. Yardeni said he did not think the new data alone would prompt another increase in short-term interest rates when the Federal Reserve System's policymaking open market committee meets in two weeks.
Too many other recent indicators of business activity, including the Fed's own, are signaling a slowing economy, he said, to allow the April inflation numbers to justify another credit tightening.
"What I think this does do is blow away the notion that we will have an easing of credit by the Fed anytime soon," the economist said.
"I had been thinking about revising my forecast of a 7% (30-year Treasury) bond yield at yearend, but now I am staying with it," Mr. Yardeni said. "The bond market was overdue for profit-taking, and the best of this year's rally is already in the books."
The yield on the Treasury's so-called long bond recently dipped below 7%, but it quickly popped back above that level Friday after the latest government figures were announced.
Mr. Yardeni said he still thinks interest rates have peaked and that the Fed's next monetary policy move will be a credit easing - but not until early next year.
Higher inflation is a passing phenomenon mostly attributable to special factors, such as the wet winter in California, said Lacy H. Hunt, chief economist at HSBC Securities Inc., New York.
In fact, Mr. Hunt thinks, the economy is quite weak right now. "We are flirting at the edge of recession right now," he said. "The economy is turning down, and the outcome remains to be seen."
Rather than signaling an inflation threat, the danger shown in Friday's data is that the numbers may prevent the Fed from easing credit soon enough to prevent a recession, he said.
Mr. Hunt feels business conditions have already slowed to the pace of a "growth recession," in which the economy is expanding at less than its long-term sustainable growth rate.
So does James W. Coons, chief economist at Huntington National Bank, Columbus, Ohio, but he also anticipates a slightly higher inflation rate of 4% by yearend.
But Mr. Coons thinks last year's interest rate increases by the Fed are probably sufficient to control the situation. Any rate increase by the central bank is unlikely until very late this year or perhaps well into next year, he said.
On the other hand, he expects no easing of credit by the Fed, a scenario for stable rates, "or at least as stable as they ever get."