Prices heat up at fast pace

Trend rekindles expectations of more rate boosts

April 20, 2006|By MARKETWATCH

WASHINGTON -- U.S. core inflation rose at the fastest pace in a year in March, the Labor Department said yesterday, rekindling expectations that the Federal Reserve might have to raise interest rates a few more times.

The core Consumer Price Index - the measure of retail-level inflation that excludes food and energy prices - increased 0.3 percent last month, matching the March 2005 gain.

Overall, consumer prices rose 0.4 percent in March, led by higher energy prices.

The increases in both the Consumer Price Index and core prices were above Wall Street expectations.

Economists surveyed by MarketWatch had expected the CPI to rise 0.3 percent in March, after rising by 0.1 percent in February.

The core rate was expected to rise 0.2 percent, on the heels of rising 0.1 percent in the previous month.

Treasury prices sank and yields rose after the report was released. The yield on the 10-year note rose above 5 percent again.

Economists said the report showed that higher energy costs are putting pressure on prices of other goods and services. Stocks managed modest gains.

"The long-awaited pass-through of higher costs to a wide range of consumer prices has arrived," said Kenneth Beauchemin, U.S. economist at Global Insight.

Beauchemin said the rise in the CPI was consistent with expectations that the Federal Reserve would be increasing rates two more times before stopping. After the summary of the Federal Open Market Committee's March meeting was released Tuesday, financial markets were betting that Fed policymakers would raise rates only one more time.

A separate measure of core inflation that does not exclude food and energy costs showed core prices rose at the fastest rate in 12 years.

The Cleveland Federal Reserve said the median CPI increased 0.4 percent in March and is up 2.7 percent in the past year, the biggest year-over-year gain in three years. The median CPI is calculated from Labor Department data.

"This was not a good report, especially if you are a member of the FOMC," said Joel Naroff, president of Naroff Economic Advisers.

The Fed did say in the FOMC's March minutes that the staff forecast expects core inflation to pick up this year before declining in 2007.

In the past 12 months, the CPI has risen 3.4 percent, down from a 3.6 percent year-over-year growth last month. The core CPI is up 2.1 percent over that time, near the top end of the Federal Reserve's presumed comfort zone for inflation.

For the first quarter, core consumer prices were up at an annual rate of 2.8 percent, after having risen 2.2 percent for all of 2005. About two-thirds of the acceleration came from higher prices for shelter, the department said.

With the CPI up 0.4 percent, real or inflation-adjusted weekly earnings fell 0.3 percent in March, the Labor Department said in a separate report. In the past year, real average weekly earnings have risen 0.1 percent.

Energy prices rose 1.3 percent in March, completely reversing the decline in the previous month. Gasoline prices increased 3.6 percent, while electricity prices rose 0.5 percent.

Apparel prices jumped 1.0 percent, the largest increase since April 1999.

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