By Jason Simpkins
Associate Editor
Wholesale food, energy and medicine costs soared in January, pushing inflation up at the fastest pace in a quarter century, the Labor Department reported yesterday (Tuesday).
Producer prices jumped by 1% for the month, more than double the increase analysts expected. The abrupt increase follows a 0.3% drop in December. Over the past 12 months, producer prices soared 7.4%, the most since October 1981.
Energy prices rose 1.5% after falling 3% in December. Food prices shot up 1.7%, their biggest jump since October 2004. Core wholesale prices, which exclude volatile food and energy prices, climbed 0.4%.
The producer price index was the last of three major Labor Department reports on January's inflation rates. The first two, the consumer price index and import prices were equally dismal. Consumer prices rose 0.4% in January, while import prices increased 1.7%.
The steep rise in inflation figures can be attributed to a weak dollar and a series of rate cuts issued by the Federal Reserve. In a desperate effort to dodge a recession, the Fed has slashed its benchmark federal funds rate by a total of 2.25 percentage points since September.
The Fed may find it harder to justify such cuts as inflation pressures continue to mount, but some economists say the Fed hopes slowing economic growth will temper price increases.
"The Fed is increasingly in a bind with rising inflation readings. Their belief is that below trend growth will dampen much of the price pressures in the U.S.," Stephen Gallagher, an economist at Societe Generale (OTC:SCGLY), told AFP.
Ben S. Bernanke, chairman of the Federal Reserve, will deliver the first portion of his monetary policy report to Congress today. He will have until tomorrow (Thursday) to explain how the central bank intends to prevent a recession without letting inflation spiral out of control.
"It will be hard for Mr. Bernanke to testify... and hold to the fiction of inflation as under control and the Fed as master of tamed inflation expectations," Robert Brusca, chief economist at FAO Economics, told MarketWatch.
On Feb. 14, Bernanke said "inflation expectations appear to have remained reasonably well anchored."
He'll have to do better than that over the next two days.
News and Related Story Links:
- MarketWatch:
Energy, food push January's PPI 1% higher
- Money Morning:
Consumer Prices Rise, Giving the Fed Cause for Concern