Consumer Price Index rises 0.5 percent

ASSOCIATED PRESS

Rising prices for gasoline, air travel and clothing propelled consumer costs 0.5 percent higher in March, raising the possibility that the Federal Reserve will increase interest rates this summer.

Yesterday’s reading on the Consumer Price Index, the government’s most closely watched inflation measure, resurrected concerns about the prospects of an inflation flare-up now that the economy is rebounding, economists said.

The report by the Labor Department “confirms my worst fear: Inflation is rising,” said Stephen Cecchetti, economics professor at Brandeis University. “Details confirm that the inflation increase isn’t in some isolated place or the consequence of some special factor.”

The 0.5 percent increase was up from February’s 0.3 percent advance and matched January’s figure.

Especially jolting was the 0.4 percent increase in “core” consumer prices, excluding energy and food costs. That was double the 0.2 percent in both January and February.

The latest snapshot of the inflation climate showed consumer prices moving up more quickly than expected. And it “solidifies the path toward a Fed tightening move this summer,” said Mark Zandi, chief economist at Economy.com.

In other economic news, the U.S. trade gap narrowed to $42.1 billion in February, representing a 3.2 percent decline from January’s record-high deficit, the Commerce Department reported. The improvement came as U.S. exports of goods and services grew strongly and outpaced the rise in imports.

With the economy rebounding, some companies are beginning to have a greater ability to raise product prices, economists said. Rising energy costs in some instances are being passed along to consumers in the form of higher prices, analysts added.

“It’s been a long time coming, but it appears that pricing power has begun to return,” said Joel Naroff, president of Naroff Economic Advisors. “The day the Fed raises rates is coming sooner than many thought.”

For the first three months of this year, consumer prices increased at an annual rate of 5.1 percent, compared with a 1.9 percent increase for all of 2003.

When the economy was struggling over the past three years to get back to full throttle, many companies found it difficult to raise prices. That created a climate in which inflation has not been a threat to the economy.

The long period of tame inflation is why Federal Reserve policy makers have been able to leave short-term interest rates at a 45-year low of 1 percent since last June.

Fed Chairman Alan Greenspan and his colleagues, however, have put consumers, investors and businesses on notice that rates cannot stay at such superlow levels indefinitely.

But they have not said when the Fed might start pushing rates up.

Mr. Zandi and other economists believe a rate increase of one-quarter percentage point could come in August — before the presidential election in November. That might upset voters and could irk President Bush, economists said.

Others, however, do not foresee the Fed raising rates until next year. Most analysts agree that the Fed probably will hold rates steady at its next meeting in May.

For the most part, economists do not foresee inflation getting out of control in the near term to short-circuit the recovery. That is because there are still parts of the economy, namely the jobs market, that have yet to fully recover and manufacturers and other businesses are still operating below capacity, analysts said.