- The Washington Times - Friday, March 16, 2007

ASSOCIATED PRESS

Consumers paid more for energy, food and a host of other items in February as a sluggish economy failed to extinguish inflation pressures. But in a hopeful sign for growth, factory output posted a better-than-expected increase.

The Labor Department reported yesterday that the Consumer Price Index rose by 0.4 percent last month, double the January increase, as energy prices shot up and bad winter weather in Florida and California sent citrus prices soaring.

The increase was larger than the 0.3 percent rise analysts had expected, although core inflation, which excludes food and energy, rose by just 0.2 percent, in line with forecasts.

But even there, economists saw problems with widespread increases in a number of categories including clothing, housing, education and medical care.

“Underlying inflation remains stubbornly above the Federal Reserve’s target and these inflation figures put the Fed in a bind,” said Mark Zandi, chief economist at Moody’s Economy.com.

The Fed, which meets Tuesday and Wednesday, would like to cut interest rates to give the sluggish economy a boost, analysts said, but the central bank cannot do so because of the stubborn persistence of inflation pressures.

In a separate report, output at the nation’s factories, mines and utilities increased by 1 percent in February, led by a 6.7 percent surge in production of electricity and natural gas.

The Fed report said this was the largest gain in utility output in 17 years and reflected colder-than-usual weather in February.

Manufacturing, which makes up four-fifths of industrial output, also showed strength, rising by 0.4 percent, only the second increase in the past five months, a period when factories have been caught in the downdraft from weakness in housing and autos.

Auto production was up 3.2 percent, helped by an increase in light trucks, a sign that automakers may be getting control of their bulging inventories of unsold cars.

“The rise in industrial production is very good news after all the downbeat data in the past two weeks,” said Nariman Behravesh, chief economist at Global Insight, another private forecasting firm.

But other economists said it may take several months to reduce the backlog of unsold goods, particularly in industries supplying the slumping housing sector.

The industrial production report showed that various industries tied to housing — appliances, furniture and carpeting — all suffered declines in February.

The widespread expectation is that Fed policy-makers will leave interest rates unchanged next week even though the economy has slowed significantly in the past year.

Worries about a recession have been heightened by the recent turbulence in the stock market, brought on by fears of rising loan defaults for subprime mortgages taken out by home buyers with weak credit.

Mr. Zandi said he saw an increased possibility of a recession, agreeing with former Federal Reserve Chairman Alan Greenspan that the risk has risen to about one-in-three. Mr. Greenspan’s comments on the possibility of a recession this year contributed to the big sell-off in stocks that has occurred since late February.

The overall CPI reading was slightly larger than expected, but it was still more moderate than a huge 1.3 percent surge in wholesale prices for February, a jump that was more than double what economists had been expecting.

At the consumer level, price pressures were led by higher energy costs, which were up 0.9 percent, with gasoline costs 0.3 percent higher. Analysts are forecasting bigger gasoline price gains at the start of the spring driving season. The nationwide average for regular gasoline has risen 20 cents per gallon over the past two weeks.

Food costs surged by 0.8 percent in February. It was the biggest increase in 22 months and reflected a 16.3 percent surge in citrus prices as well as higher costs for fruit and vegetables.

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