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U.S. Consumer Prices Jump, Spark Inflation Worry

Reuters | March 23, 2005

WASHINGTON - A big jump in energy costs pushed U.S. consumer prices up 0.4 percent in February and the pace of underlying inflation also quickened, the government said on Wednesday in a report that stoked inflation worries.

The Labor Department said the core consumer price index, which strips out volatile food and energy costs, rose 0.3 percent. It was the biggest rise since September and broke a string of four straight gains of 0.2 percent.

Wall Street economists had expected the widely used consumer price index to rise a milder 0.3 percent overall and 0.2 percent excluding food and energy.

The consumer price report added to growing inflation jitters and increased speculation the Federal Reserve, which raised credit costs on Tuesday, might step up the pace of its rate increases to keep inflation at bay.

Prices for U.S. government bonds moved into negative territory after the report, with the yield on the benchmark 10-year note hitting its highest level since June 2004.

The U.S. dollar, already trading at one-month highs against the euro, moved higher still, while futures markets bet on stocks prices opening down.

The Fed on Tuesday took note of growing inflation pressures as it bumped overnight borrowing costs up a quarter-percentage point to 2.75 percent, leaving itself room to depart from its "measured" course of small rate hikes if needed.

"Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident," it said.

Over the past 12 months, consumer prices have risen 3 percent, in part reflecting a 10.4 percent surge in energy costs.

Energy prices climbed 2 percent in February, the biggest gain since October, as the cost of gasoline, fuel oil and natural gas all shot higher. The department's measure of transportation prices, reflecting increased fuel costs, increased 0.8 percent.

However, the core CPI has also been marching higher. Over the 12 months ended in February, core consumer prices are up 2.4 percent. While not high by historical standards, it still marked the sharpest 12-month gain in 2-1/2 years.

"This is just giving people more reason to think the Fed is going to move away from 'measured' pace," said John Beerling, chief dealer at Wells Fargo in Minneapolis.

The department said the acceleration in the core rate in February reflected a big turnaround in lodging costs, which rose 1.1 percent after a 0.7 percent January drop, and a steep rise in the cost of medical care. Medical care prices, which had already been rising sharply, shot up 0.6 percent.

Those gains more than offset a smaller rise in new car and truck prices, which edged up just 0.1 percent last month after a 0.7 percent gain in January, and a 0.2 percent drop in apparel prices.

The pace of inflation has moved up even though wage gains are still tepid and falling short of what workers need to keep up with rising prices.

Over the past 12 months, average weekly earnings have advanced a mild 2.2 percent. When adjusted for inflation, earnings are off 0.8 percent.

The Fed's rate-hike campaign, coupled with data suggesting a less-benign inflation outlook and words from Fed officials, have finally begun to push up the long-term rates set by the markets, including the cost of home loans.

The Mortgage Bankers Association said on Wednesday applications for U.S. home mortgages decreased last week, with both new lending and refinancing activity down, due to a rise in the cost of loans.

Interest rates on fixed 30-year loans have been steadily climbing in recent weeks and hit an average 5.95 percent last week, the highest level since August.

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