Consumer Prices Rise, Giving the Fed Cause for Concern

By Jason Simpkins
Associate Editor

Consumer prices rose 0.4% in January, an indication that Federal Reserve policymakers will have to think twice about the risk of inflation before making more interest rate cuts.

Energy prices rose 0.7% last month after gaining 1.7% in December, the Labor Department reported yesterday (Wednesday). Fuel costs were up 4.5%.  Food prices, which account for one-fifth of the consumer price index, jumped 0.7%. The core rate of inflation, which excludes food and energy costs, rose 0.3% after a 0.2% increase in December.

"It's not a very welcome report from the Fed's perspective,” Zach Pandl, an economist at Lehman Brothers Holdings Inc. (LEH), told Bloomberg News. "We think the slowing economy will bring down inflation but we are seeing a lot of cost pressures still and that slowdown in inflation looks like it will be gradual.”

Soaring energy and commodity costs, coupled with a weak dollar, are keeping prices high despite the economic downturn we are currently experiencing. Yesterday, the price of light, sweet crude for March delivery settled at a record $100.01 a barrel on the New York Mercantile Exchange, after earlier rising to $100.10, a new trading record.

It was the first time since Jan. 3 that oil had been above $100 a barrel, and yet another sign that energy costs will remain high in coming months. At the same time, the greenback declined to a two-week low against the euro on speculation the Federal Reserve will further cut its benchmark interest rate from 3%.

The Fed has cut rates by a total of 2.25 percentage points since September. The dollar has subsequently dropped about 8% since the beginning of 2007 when compared to a basket of trade-weighted currencies from major U.S. trading partners.

This runs contrary to Fed Chairman Ben S. Bernanke's Feb. 14 assessment that "inflation expectations appear to have remained reasonably well anchored.”

The next day, the government reported that import prices for January increased 1.7%, more than twice as much as had been expected. The unexpected increase pushed the 12-month price increase to 13.7% from the same period a year prior, the largest increase since 1982.

For the month, the cost of China imports increased 0.8%, and was up 3.3% for the 12-months ended in January. Latin America imports cost 3.6% more, while European Union goods were 1.1% more expensive.

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