Prices paid by consumers in May rose at their fastest rate in more than three years, the Labor Department reported yesterday. The news was greeted positively by stock and bond traders, who had been worried before the report that the news might be worse than it was.
The rise in the broad Consumer Price Index was 0.6 percent, a bit higher than the consensus Wall Street forecast of 0.5 percent. The increase followed a rise of 0.2 percent in April. The index was pushed higher by rising energy and dairy prices, which posted their largest monthly gain since 1946.
Excluding the volatile food and energy sectors, the "core" Consumer Price Index increased by 0.2 percent. That matched expectations, and was down a bit from the 0.3 percent increase in April.
The inflation report seemed to reinforce the notion on Wall Street that the Federal Reserve's policy-making Open Market Committee is likely to raise the overnight federal funds rate when it meets in Washington at the end of the month.
Fed Reserve Chairman Alan Greenspan told the Senate banking committee that "inflation is not likely to be a serious concern" but that policy-makers are closely watching the effect of rising energy prices on the world and U.S. economies.
Greenspan's remarks last week heightened concerns in the markets about prospects for inflation and the Fed's response.
"What was earlier an underlying concern about an emerging inflation threat has turned into an outright fear," said Robert Di Clemente, chief U.S. economist at Smith Barney. "The 0.2 percent increase in the core rate was a relief, and it has kind of evened up the debate about how aggressive the Fed has to be."
Stock prices rose yesterday. The Dow Jones industrial average advanced 45 points to 10,280; the Standard & Poor's 500 index climbed 6 points to 1,132; and the Nasdaq composite index spurted 25 points to 1,995.
In the first five months of the year, consumer prices rose at a seasonally adjusted annual rate of 5.1 percent, far exceeding the 1.9 percent increase for all of last year. During the same period, the core index rose at an annual rate of 2.9 percent, much faster than the 1.1 percent gain registered for all of last year.
Much of the gain in the broad index resulted from rising energy and food prices. Many analysts have said that those increases are not sustainable.
