April 14, 2004
Associated Press

WASHINGTON -- Rising prices for gasoline, air travel and clothing propelled consumer costs 0.5 percent higher in March, raising the possibility the Federal Reserve may raise interest rates this summer.

Wednesday's reading on the Consumer Price Index, the government's most closely watched inflation measure, resurrected concerns about the prospects of an inflation flare-up now that the economy is rebounding, economists said.

The report by the Labor Department "confirms my worst fear: Inflation is rising," said Stephen Cecchetti, economics professor at Brandeis University. "Details confirm that the inflation increase isn't in some isolated place, or the consequence of some special factor."

The 0.5 percent increase was up from February's 0.3 percent advance and matched January's figure.

Especially jolting was the 0.4 percent increase in "core" consumer prices, excluding energy and food costs. That was double the 0.2 percent in both January and February.

The latest snapshot of the inflation climate showed consumer prices moving up more quickly than expected. And it "solidifies the path toward a Fed tightening move this summer," said Mark Zandi, chief economist at Economy.com.

In other economic news, the U.S. trade gap narrowed to $42.1 billion in February, representing a 3.2 percent decline from January's record high deficit, the Commerce Department reported. The improvement came as U.S. exports of goods and services grew strongly and outpaced the rise in imports.

With the economy rebounding, some companies are beginning to have a greater ability to raise product prices, economists said. Rising energy costs in some cases are being passed along to consumers in the form of higher prices, analysts added.

"It's been a long time coming, but it appears that pricing power has begun to return," said Joel Naroff, president of Naroff Economic Advisors. "The day the Fed raises rates is coming sooner than many thought."

For the first three months of this year, consumer prices increased at an annual rate of 5.1 percent, compared with a 1.9 percent increase for all of 2003.

While the economy was struggling during the past three years to get back to full throttle, many companies found it difficult to raise prices. That created a climate where inflation hasn't been a threat to the economy.

The long period of tame inflation is why Federal Reserve policy-makers have been able to leave short-term interest rates at a 45-year low of 1 percent since June.

Fed Chairman Alan Greenspan and his colleagues, however, have put consumers, investors and businesses on notice that rates can't stay at such super-low levels indefinitely. But they haven't said when the Fed might start pushing rates up.

Zandi and other economists think a rate increase of one-quarter percentage point could come in August -- before the presidential election in November. That might upset voters and could irk President Bush, economists said.

Others, however, don't foresee the Fed raising rates until 2005. Most analysts agree that the Fed probably will hold rates steady at its next meeting in May.

For the most part, economists don't foresee inflation getting out of control in the near term to short-circuit the recovery. That's because there are still parts of the economy, namely the jobs market, that have yet to fully heal and manufacturers and other businesses are still operating below capacity, analysts said.

In March, energy prices rose by 1.9 percent, following a 1.7 percent advance. The increase in energy prices last month reflected a 5.5 percent jump in gasoline prices.

Strong demand and tight supplies have pushed up energy prices. Looking ahead, analysts believe prices could climb higher, especially in light of a recent decision by the Organization of Petroleum Exporting Countries to cut its oil output target.

Airfare prices rose by 1.1 percent, clothing prices increased 0.9 percent and lodging costs shot up 3.8 percent in March. Food prices increased by 0.2 percent for the second month in a row.

Medical care costs, meanwhile, went up by 0.6 percent and prices for college tuition and fees rose by 0.8 percent last month. Both categories have been sore spots for consumers.

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