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Stocks tumble after consumer prices surge
Business Week
May 17, 2006

MAY. 17 2:44 P.M. ET  Consumer prices vaulted higher in April, fueling concerns the Federal Reserve might keep pushing interest rates up to fend off inflation. Discouraged Wall Street investors sent stocks tumbling.

Soaring prices for gasoline and other energy products have played a major role in the spikes seen over the past two months. But the price tags of lots of other goods and services also are climbing.

The closely watched Consumer Price Index rose 0.6 percent, the biggest jump in three months, the Labor Department said Wednesday. That followed an already strong 0.4 percent advance in March.

"The whiff of inflation is feeling more like a gust," observed Richard Yamarone, economist at Argus Research. "The inflation picture is worsening."

On Wall Street, stocks plunged. The Dow Jones industrials plummeted 200 points in afternoon trading.

Excluding energy and food prices, "core" prices went up 0.3 percent in April for the second month in a row. The sizable back-to-back increases suggested that rising energy costs may be starting to breed wider inflation throughout the economy.

Stuart Hoffman, chief economist at PNC Financial Services Group, described the inflation performance as "rotten to the core." He and other economists said it indicates that more companies are passing along some of their higher costs for energy and other materials to consumers.

The latest inflation readings were higher than economists anticipated. They were forecasting a 0.5 percent increase in overall consumer prices and a 0.2 percent rise in core prices.

So far this year, consumer prices are rising at an annual rate of 5.1 percent, much faster than the 3.4 percent increase registered for all of 2005. Core prices are advancing at a brisk 3 percent pace, compared with a more moderate 2.2 percent rise for last year.

To thwart inflation, the Federal Reserve bumped up interest rates last week to a five-year high of 5 percent. It was the 16th increase in a row since the Fed began to tighten credit in June 2004.

Fed policymakers left options for future decisions wide open. They suggested another increase might be possible, or they could take a pause in their rate-raising campaign depending on how inflation and economic activity unfold.

A growing number of economists said Wednesday's inflation report raises the odds for another rate increase at the Fed's next meeting, June 28-29. "I conclude that higher interest rates are in our future," said Brandeis University economics professor Stephen Cecchetti.

Some, however, still believe the Fed will leave rates alone at the June meeting on the grounds that slower economic growth will eventually ease inflation pressures.

The economy in the first quarter of this year grew at a brisk 4.8 percent pace, the fastest in 2 1/2 years. Growth is expected to slow to around a 3 percent pace in the April-to-June period, which would still be healthy.

One of the things the Fed will be keeping close tabs on is how energy prices affect inflation and economic activity.

Energy prices can make inflation worse. They also can crimp overall economic activity by forcing consumers to pare their spending and investment. Or, high energy prices can result in both scenarios -- which would be a tricky problem for the Fed to deal with. To counter inflation, the Fed would be inclined to boost interest rates. To treat economic weakness, the Fed would want to leave rates alone or, in more serious cases, lower them.

Oil prices hit a record high of $75.17 a barrel in late April; they are now hovering below $69 a barrel. Those high crude oil prices have pushed up prices at the gasoline pumps to $3 a gallon in some areas.

Wednesday's report said energy prices shot up 3.9 percent in April, the most since January. Gasoline prices jumped 8.8 percent. Fuel oil prices went up 5.2 percent.

Other prices also bounded ahead last month.

Airline fares rose 1.6 percent, the most in nine months. Hospital and other related services climbed 0.8 percent, the most in two months. Clothing prices increased 0.6 percent. Education costs, including tuition and books, rose 0.5 percent. Prices for shelter, a broad category including rent, went up 0.3 percent.

There were a few bright spots for shoppers. Food prices were flat in April. Computer prices dropped 2.6 percent. Prices for tobacco and smoking products dipped 0.2 percent.

Against the backdrop of mostly rising prices, workers are seeing only small gains in their paychecks.

A separate report issued by the department showed workers' average weekly earnings, after adjusting for inflation, edged up 0.2 percent in April. That was an improvement from a 0.1 percent dip in March.

"Workers are making some headway -- but it is not very much," said Ken Mayland of ClearView Economics.

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