Higher Energy And Food Costs Push Inflation Up

Friday, March 16th 2007, 8:08 am
By: News On 6

WASHINGTON (AP) _ Consumer inflation spurted higher in February, reflecting rising costs for gasoline and big jumps for food as the impact of adverse winter weather on citrus crops began to be felt.

The Labor Department reported Friday that its Consumer Price Index rose by 0.4 percent last month, double the January increase and the largest advance since a similar increase in December.

The increase was larger than the 0.3 percent gain that had been forecast although excluding volatile food and energy prices, inflation was better-behaved, rising by just 0.2 percent, exactly what economists had been expecting.

Federal Reserve policymakers meet next Tuesday and Wednesday with the wide expectation that they will leave interest rates unchanged even though the economy has slowed significantly under the impact of a steep slump in housing and troubles in autos and other parts of manufacturing.

While the Fed would normally be expected to ride to the rescue of a faltering economy by cutting rates, the stubbornly high inflation readings are expected to boost the arguments of Fed officials that the biggest threat to the economy remains the risk of higher inflation, not weaker growth.

The overall CPI reading was slightly bigger than expected, but it was still more moderate than a huge 1.3 percent surge in wholesale prices for February, a jump that was more than double what economists had been expecting.

At the consumer level, price pressures were led by higher energy costs, which were up 0.9 percent last month after having fallen by 1.5 percent in January.

Gasoline costs rose by 0.3 percent with economists forecasting even bigger advances as the spring driving season gets under way. The latest Lundberg Survey found that the nationwide average for gasoline has risen by 20 cents per gallon in just the past two months.

Food costs shot up by 0.8 percent in February, the biggest increase in 22 months. The gain was led by 16.3 percent surge in citrus prices, reflecting adverse weather in January in California growing areas. Rising fruit and vegetable costs contributed three-fifths of February's higher food costs.

Economists are predicting that inflation should moderate this year, but they stress that this forecast is heavily dependent on stable global oil prices, something that did not occur last year as Mideast tensions and rising demand from countries such as Asia sent crude oil surging to all-time highs.

So far the moderation in inflation has not occurred. For the first two months of this year, consumer prices are rising at an annual rate of 3.3 percent, up from a 2.5 percent increase for all of 2006.

Core inflation, which excluded energy and food, has been rising at an annual rate of 3 percent over the past two months, far above the Fed's comfort zone for gains of 1 percent to 2 percent in core prices. Last year, core inflation rose by 2.6 percent, which was the highest reading since 2001.

The Fed raised interest rates for two years with the last rate hike occurring in June 2006 as it attempted to achieve a soft landing for the economy in which economic growth slows enough to dampen inflation pressures but not enough to push the country into a recession.

Outside of food and energy, price pressures in February were seen in rising costs for shelter, medical care and clothing.