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Consumers Continue to Struggle as U.S. Inflation Rate Hits Fastest Pace Since 2008

The accelerating U.S. inflation rate reached its fastest pace in two and a half years last month as consumers continue dealing with higher food and energy prices.

The consumer price index (CPI) in April rose 3.2% over the last 12 months, the biggest yearly jump since October 2008. That's up from a yearly jump of 2.7% in March and 2.1% in February. The CPI in April increased 0.4% from the previous month.

The U.S. Labor Department reported Friday that rising energy prices contributed to more than half of the increase. Gasoline prices soared 3.3% in April and 33.1% over the past year.

Food prices have climbed 3.2% over the past year and were up 0.4% in April. A decline in fresh vegetable prices stunted food-price growth, which previously rose 0.8% in March.

Core inflation – which excludes volatile food and energy prices – was up 0.2% in April and 1.3% from a year earlier. The U.S. Federal Reserve uses core inflation to gauge consumer costs, and the Fed is unlikely to adjust interest rates or quantitative easing measures as long as core inflation remains under its unofficial 2% target.

"On the core side it is a slow drift, but it is nonetheless there," Joshua Shapiro, chief U.S. economist at MFR Inc., told The New York Times. "What will be important to the Fed is the mix between inflation and real growth."

The core index has risen by 0.2% three times in the last four months, pushed up by rising prices for new vehicles, shelter, medical care and airline tickets.

U.S. Federal Reserve Chairman Ben Bernanke said at a press conference the central bank still thinks inflation is transitory, and it expects rising prices to start to cool this year.

In economic projections released at the conference, the Fed raised its inflation outlook to 2.1% to 2.8% in 2011 from its January predictions of 1.3% to 1.7%. It expects inflation to fall to 1.2% to 2.0% in 2012, and to remain at 1.4% to 2.0% in 2013.

"[Inflation] is still not of concern to the Fed," Stuart Hoffman, chief economist at the PNC Financial Services Group, told The Times. "We are sort of in the middle, not going up too fast to worry the Fed about inflation."

Some economists think gasoline prices are almost done their climb and consumers will soon feel relief.

"I don't see inflation as running at high enough levels to threaten the recovery, especially now that we're seeing signs that gasoline prices have peaked," David Resler, chief economist at Nomura Securities, told CNNMoney. "If that proves to be the case, we can all breathe a little easier."

A survey by The Wall Street Journal asked 55 economists their views on the U.S. inflation rate, and many agreed with the Fed's position that higher prices are nearing their peak.

The majority of economists surveyed said they expected inflation to moderate over the next year, slowing to 3% by the end of 2011 and below 2.5% in 2012. They expect food and energy prices to gain but at a much slower rate than they did at the beginning of this year.

"For energy prices to affect the rate of inflation over the next four years to the same extent – they rose at around 25% or so last year – they would have to keep rising at 25% per year for the next three or four years," said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota. "I don't believe that's going to happen."

But U.S. consumers are not convinced that rising prices will subside, as they continue to fork over more money at the gas pump and grocery store. The average price of a gallon of regular gasoline hit $3.955 yesterday (Monday), up about 30% this year.

To compensate, many households are driving less, shopping less, and brown-bagging their lunch more often to budget in higher costs.

"Consumers are spending more, but it's getting soaked up in higher gas prices and higher food prices," John Ryding, chief economist at RDQ Economics, told The Times. "That's not leaving nearly as much left over for discretionary spending."

The strain on household budgets is a major concern since consumer spending makes up 70% of U.S. economic activity. The U.S. recovery has shown signs of stalling as gross domestic product (GDP) growth slowed in 2011's first quarter to 1.8%, down from 3.1% at the end of 2010.

U.S. households' budget struggles have led many to doubt the Fed's take on the U.S. inflation rate, especially with Bernanke's claim that rising prices are "well anchored."

"Last time I checked, inflation costs were anything but well anchored and companies are, in fact, passing along costs as fast as they can," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "McDonald's Corp. (NYSE: MCD), Nestle SA, and Wal-Mart Stores Inc. (NYSE: WMT) are just a few of the companies that have spoken out about the specific impact that higher component and ingredient costs have had on their earnings. Many have adjusted their guidance."

Kimberly-Clark Corp. (NYSE: KMB) recently announced price hikes of 3% to 7% for certain petroleum-based products, and The Procter & Gamble Co. (NYSE: PG) said it would raise prices on some items by 5%. Apparel makers like Hanesbrands Inc. (NYSE: HBI) and Nike Inc. (NYSE: NKE) also said they have started raising prices due to higher costs of oil and cotton.

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  1. Frankie Diaz | May 17, 2011

    Well, I'm glad Mr. and Mrs. Bernanke are doing great! Seems there's no lack of hallucinogenic (I mean, mood-enhancing) medication at their home!

    Core inflation up ONLY 0.2%. Inflation still not of concern to the Fed. Right.

    WHEN will those youngsters realize their manipulations are wrecking everyone?!? God save us from social and economic improvers!

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