Prices keep rising for consumers in January
Seattle Times
The Associated Press
February 20, 2008

WASHINGTON — Consumers paid more to fill up their gas tanks, buy groceries and go to the hospital in January as prices on a wide range of items pushed higher.

Inflation was increasing even as the economy was slowing dramatically, a development certain to raise concerns at the Federal Reserve, which has been cutting interest rates aggressively in the belief that fighting off a threatened recession was more important than worrying about inflation pressures.

The Labor Department reported that its closely watched Consumer Price Index (CPI) posted a gain of 0.4 percent last month, matching the December increase and higher than the 0.3 percent rise that analysts had expected. Food costs jumped by the largest amount in 11 months, led by big gains for vegetables, fruit, poultry and pork.

Core inflation, which excludes food and energy, rose by 0.3 percent, the biggest jump in this measure in seven months. That increase reflected higher prices for medical care, education, clothing, tobacco and airline fares.

"The economy may be faltering, but that has not stopped firms from raising prices," said Joel Naroff, chief economist at Naroff Economic Advisers. "It didn't matter whether you went to the supermarket or ate out, costs were up."

With the latest increase, core prices have risen over the past 12 months by 2.5 percent, the biggest jump in 10 months and far above the Fed's comfort zone of 1 percent to 2 percent gains in the underlying inflation rate. The increase in inflation pressures is coming at a time when economic growth has slowed sharply, raising concerns that the country might be in danger of falling into a recession.

The Fed last month began an aggressive campaign to cut interest rates, lowering a key rate by the largest amount in a single month in more than a quarter-century. Analysts said they believe the Fed will see the threat of a recession as a bigger risk at the moment than the rise in inflation. But some predicted the Fed might cut rates by a smaller quarter-point cut at the March 18 meeting rather than the half-point move that markets are now expecting.

A second report today showed that the housing sector remains in a steep downturn. Construction of new homes and apartments edged up by a slight 0.8 percent in December to an annual rate of 1.012 million units. But all of the strength came from a rebound in apartment construction, which had plunged in December. The larger single-family sector fell by 5.2 percent last month.

And applications for building permits, considered a good sign of where construction is headed, fell by 3 percent to an annual rate of 1.048 million units, the lowest level since November 1991.

"Clearly the housing recession continues with no end in sight," said Bernard Baumohl, managing director of the Economic Outlook Group, a private forecasting firm.

The prolonged decline in housing, with falling sales and weak prices, has been a major drag on the overall economy. Growth skidded to a near standstill in the final three months of last year, rising at an annual rate of just 0.6 percent.

Some economists believe growth in this quarter and the next will turn negative, fulfilling the classic definition of a recession. To combat the economic weakness, Congress passed a $168 billion economic stimulus package to provide tax rebates to millions of families starting this spring.

Meanwhile, the Labor Department said that average weekly earnings for non-supervisory employees, the bulk of the work force, fell by 1.4 percent in January, compared to a year ago. It was the fourth consecutive monthly decline, when compared to a year ago, and further evidence that wage gains are failing to keep up with inflation.

For all of 2007, consumer inflation rose by 4.1 percent, the biggest increase in 17 years, as the costs of both food and energy accelerated sharply. Economists said they still believe that food and energy will moderate this year as the weak economy dampens price pressures, but they conceded that events could derail those expectations, noting the jump this week in oil prices to a close on Tuesday above $100 per barrel for the first time in history.

For January, energy costs were up 0.7 percent with gasoline costs rising by 1.2 percent.

Medical costs showed a 0.5 percent increase, up from a 0.3 percent rise in December. Prescription drug prices shot up by 0.7 percent, the biggest rise in a year, while hospital prices were up by 1 percent.

The category that includes education costs rose by 0.4 percent while airline fares were up by 0.8 percent, reflecting higher fuel costs, and clothing costs rose by 0.4 percent, while clothing costs rose by 0.4 percent. Analysts blamed the fifth monthly rise in clothing prices on a weaker dollar against many foreign currencies, which pushes the price of imported clothes higher.

The report on housing showed construction was up by 18.9 percent in the Northeast, reflecting an unusually warm January, and up by 12 percent in the Midwest, also a gain that was attributed to weather. Construction fell by 6.1 percent in the West and dropped 2.9 percent in the South.

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