January Inflation Up, Energy Prices Spike

Feb. 20, 2004
By Tim Ahmann

WASHINGTON (Reuters) - A sharp rise in energy costs pushed U.S. consumer prices up at their fastest pace in nearly a year last month, but underlying price pressures remained muted, a government report showed on Friday.

The consumer price index, the most widely used gauge of U.S. inflation, climbed 0.5 percent in January after a 0.2 percent rise the month before, the Labor Department said.

The so-called core CPI, which strips out volatile food and energy prices, gained just 0.2 percent.

Wall Street economists had expected the overall CPI to rise 0.3 percent and the core index to tick up a slim 0.1 percent.

The mild increase in core inflation, while larger than expected, held the 12-month change steady at the nearly 38-year low of 1.1 percent hit in December.

Federal Reserve officials see such a low rate of change as tantamount to price stability, and economists said at most inflation was stabilizing after a period of slowing.

U.S. Treasury bond prices dipped slightly and the dollar moved up a bit on the higher-than-expected readings, moves exacerbated later by word of a terror alert in Japan. Stock prices were off a bit in late morning, with the blue chip Dow Jones industrial average down 48 points at 10,616.

Economists said the benign core inflation reading meant the Fed could bide its time before pushing overnight interest rates up from their 1958 low of 1 percent.

"This is not worrisome from the Fed's standpoint, but an acceptable ... pace of inflation that will allow policymakers to raise rates if and when employment growth picks up to a vigorous clip," said Steve Stanley, an economist with RBS Greenwich Capital in Greenwich, Connecticut.

FUELING INFLATION

Much of the increase in overall consumer prices was due to a big jump in energy costs, which were up 4.7 percent last month -- the biggest increase since March.

Gasoline prices rose 8.1 percent, the largest jump since last February, while fuel oil costs spiked 7.2 percent and natural gas prices increased 3.8 percent.

The energy price rises fed through to a sharp 1.7 percent increase in transportation costs, even though new car prices fell. And the higher price of heating a home helped push housing costs up 0.4 percent, the sharpest gain since March.

Some economists pointed to a 0.6 percent rise in tobacco costs as a possible factor in the higher-than-expected core inflation reading, but said it would likely prove transitory.

While most economists focused on the slow pace of core inflation, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said the quickened pace of overall inflation likely reflected a weaker dollar and could prove durable.

"While economists typically view food and energy price increases as fluctuating randomly around the core rate of inflation, it would be wrong to view the recent trend is this context," he said.

Fed officials had worried last year about inflation moving too low. But now that the economy is showing some muscle, they have expressed a greater degree of comfort.

Still, they have consistently said inflation is unlikely to prove troublesome anytime soon and have vowed to act patiently as they consider when to push interest rates up.

"With inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation," Greenspan told Congress last week.

Financial markets have been betting on a rate rise in August or September, while many economists expect the Fed to stay on hold into next year.

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