WASHINGTON -- Government reports issued yesterday showing a healthy economy with signs of rising price pressures reinforced expectations that Federal Reserve officials will act next week to lift short-term interest rates.
Many analysts are more confident that Fed officials will raise the federal funds rate to 4.75% from 4.25%, and some expect an accompanying increase in the discount rate, now 3.50%
"Today's numbers took the debate from whether to how much," said Donald Ratajczak, director of economic forecasting at Georgia State University.
"The task for Fed officials is always complicated, but if it's ever been clear that they need to establish their credibility in fighting the good fight, this is it," said Hugh Johnson, chief investment officer for First Albany Corp. "They need to send a message to the market that they are concerned about upward pressure on inflation in a strengthening economy."
The analysts' comments came after the Commerce Department reported that retail sales in July slipped 0.1% as consumers cut back on their purchases of autos and light trucks. However, total retail sales figures for June and May were revised higher, suggesting that second quarter consumer spending was stronger than believed earlier.
A separate report from the Labor Department said the producer price index for July jumped 0.5%, the biggest monthly gain since April 1993. While much of the increase came on surging prices for fuel and coffee in the finished goods index, there were also sizable jumps in the indexes for crude and intermediate goods.
Members of the Federal Open Market Committee meet next Tuesday to review monetary policy, and the bond market has already priced in at least an increase of 25 basis points in short-term rates.
Some Fed officials have said they expect the economy to slow to a more sustainable pace of between 2.5% and 3% in the second half of the year. But others, notably San Francisco Bank president Robert Perry, have been vocal in stressing that the economy is operating close to capacity.
Ratajczak said he sees little evidence that the economy is cooling and estimated that growth is still running at about 3.5%, the same pace as during the first half of the year.
The Commerce Department's initial estimate for second-quarter gross domestic product put growth at 3.7%, but analysts yesterday said that it now appears inventories did not bulge as much as initially believed while consumers spent more.
"It's a healthier mix. The sense of a consumer pause is not so pronounced, and the consumer really is spending fairly freely," said Susan Hering, an economist at Salomon Brothers Inc.
Hering and other analysts said they now believe second-quarter GDP rose about 4%, which would mean the economy had even more momentum than thought and is further from the 2.5% rate that is often considered an acceptable noninflationary pace by Fed officials.
The dip in July retail sales came largely from a 1.7% downturn in auto sales. However, dealers say they are short many popular models and expect sales to resume in the fall.
Excluding autos, sales advanced a respectable 0.4% after rising 0.8% in June. Sales of building materials surged 1.5%, despite a slowdown in residential home construction, and sales of furniture shot up 1.3% after a gain of 1.4% in June.
The 0.5% jump in the producer price index reflected a huge 43% run-up in coffee prices from the freeze in Brazil and an 8% increase in gasoline prices as a result of tighter world oil supplies. Excluding food and energy, finished goods prices were up only 0.1%.
Analysts said the fact that producer prices excluding food and energy remained tame was encouraging, but they also cited signs beneath that surface of rising price pressures for various types of goods. Excluding food and energy, prices of intermediate goods such as metals and chemicals rose 0.4%, and prices of paper and other crude goods soared 2%.
Fed chairman Alan Greenspan has commented that he and other officials are paying close attention to prices of commodities for signs of future inflation. He also said officials are watching financial markets, where the yield on the 30-year Treasury bond fell again yesterday on revived inflation worries.
"Greenspan is very sensitive to what the market is telling him," said Johnson, adding that a bold move to raise short-term rates by 50 basis points would help the bond market by easing fears about inflation in 1995.