U.S. Economy: Inflation Picks Up, Validating Bernanke

U.S. consumer prices rose more than forecast in January, giving credence to Federal Reserve Chairman Ben S. Bernanke's message that inflation remains the central bank's primary concern.

The consumer price index increased 0.2 percent as Americans paid more for food, medical care and air travel, the Labor Department said today in Washington. Prices excluding food and energy rose 0.3 percent, the most since June. Separately, the Conference Board in New York said its index of leading economic indicators rose for a second month in January.

The price figures show that inflation, which policy makers anticipate will gradually recede in the next two years, isn't dissipating easily. Treasury notes fell on speculation that the report will strengthen the Fed's resolve not to cut interest rates in coming months.

``This is kind of a wake-up call to the market,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. Inflation ``is sticky, so it's still on the front burner of concerns for the Fed.''

Fed policy makers at their most recent meeting considered dropping their bias toward higher interest rates and rejected the idea because inflation remained the ``predominant concern,'' according to January minutes of the Federal Open Market Committee released today.

Leading Indicators

The index of leading economic indicators, which points to the direction of the economy over the next three to six months, increased 0.1 percent last month after a 0.6 percent December gain that was more than previously reported.

Economists had forecast the consumer price index to rise 0.1 percent, according to the median of forecasts in a Bloomberg News survey. So-called core prices that exclude food and energy were predicted to increase 0.2 percent.

Core inflation climbed to 2.7 percent during the 12 months ended in January, the biggest rise since October, after a 2.6 percent rise for the period ended in December.

The larger-than-forecast increase in consumer prices in January doesn't alter the view that inflation is poised to be ``gradually tilting down,'' Fed Bank of St. Louis President William Poole said in an interview today.

``It would be a mistake for us to act on one month's information,'' said Poole, a voting member of the Federal Open Market Committee this year. ``We should keep it in perspective.''

The yield on the benchmark 10-year note rose 1 basis point to 4.69 percent in New York. The dollar advanced against the euro and extended a rally versus the yen.

The government for the first time reported the inflation measures out to the third decimal place, a change that contributed to boosting the core reading. That may have helped to mute market reaction.

Bernanke's Comfort Zone

Fed policy makers, seeking to subdue inflation without hurting growth, held their benchmark rate at 5.25 percent the past five meetings. Bernanke told lawmakers last week that lower prices for oil, commodities and rent will help push down the preferred inflation gauge to within his comfort zone next year.

``If inflation becomes higher for some reason, then the Federal Reserve would have to respond to it,'' Bernanke said in response to questions from House Financial Services Committee Chairman Barney Frank of Massachusetts.

One measure, the personal consumption expenditures index minus food and energy, the Fed's preferred inflation gauge, rose 2.2 percent in December from a year ago, the Commerce Department reported on Feb. 1.

The gauge has been at or above Bernanke's ``comfort'' range of 1 percent to 2 percent for almost three years. He said last week that the Fed's ``predominant'' concern is that inflation may not ease as anticipated.

Medical Costs

The cost of medical care increased 0.8 percent in January, the biggest gain since August 1991, after a 0.2 percent rise in December. Prescription drug costs also rose by the most since August 1991, and physicians' services jumped 1.2 percent, the biggest gain since October 1981.

The price of airfares increased 2.1 percent, the most since November 2004. American Airlines, United Airlines, Delta Air Lines Inc. and Northwest Airlines Corp., four of the five largest U.S. carriers, in January raised round-trip fares by as much as $10 in the industry's first major boost this year.

The cost of tobacco products jumped 3.1 percent, the most since June 2002.

Today's report showed energy prices fell 1.5 percent, after a 4.2 percent increase in December. Gasoline prices dropped 3 percent. Fuel oil costs declined 5.6 percent and natural gas prices fell 3 percent.

New-vehicle prices were unchanged and clothing costs rose 0.3 percent.

Food Prices

Food prices, which account for about a fifth of the CPI, increased 0.7 percent after no change in December. Prices rose for fruits and vegetables after a freeze last month in California.

Housing costs, which include some energy costs and account for one-third of the total consumer price index, rose 0.2 percent after increasing 0.4 percent a month earlier.

Rising rents, which make up almost 40 percent of the core CPI, have been stoking inflation as less affordable home prices make renting more attractive. A category designed to track rental prices rose 0.2 percent after a 0.3 percent increase.

With today's report, the Labor Department for the first time reported the price index levels out to three decimal places. Without that change, the core price index would have been up just 0.2 percent, matching expectations.

Three Decimal Points

Last month's core index was 208.632 compared with a December reading of 208.1 that reflected the previous methodology of publishing the figures out to one decimal point.

The resulting 0.256 percent change for the month rounded up to 0.3 percent.

``One can see it was right on the cusp'' in January, Patrick Jackman, a senior economist at the Bureau of Labor Statistics, said in an interview in Washington.

According to Jackman, the government decided not to provide previous index levels out to three decimal points, which would have provided a more accurate comparison.

While it may influence any one month's reading, the change over an extended period of time would not affect the trajectory of inflation.

source:www.bloomberg.com