Catching It In The Wallet

Consumer Price Report Shows Signs of Inflation

By Nell Henderson
Washington Post Staff Writer
Wednesday, May 17, 2006; 1:12 PM

Inflation picked up in April as consumers paid higher prices for gasoline, housing, clothing, medical care and other items, the government reported today.

The Labor Department said its consumer price index, a widely followed inflation gauge, rose 0.6 percent last month, the biggest increase in three months, largely reflecting a 3.9 percent jump in energy prices.

But prices of many other goods and services rose as well. The core-CPI, which excludes food and energy was up 0.3 percent, same as in March, reflecting higher prices for items such as air travel, used cars and electricity.

Stock prices fell sharply after the report fanned investors' concerns that businesses are passing more of their climbing costs to consumers and that the Federal Reserve will have to keep raising interest rates to prevent inflation from taking off.

"It's a real inflation scare in the market," said David Shulman, a visiting scholar at the UCLA Anderson Forecast. "The Fed may see a slowing economy coming from a weakness in housing construction, combined with rising inflation. It could smell like a stagflation. . . . Interest rates could be [headed] much higher than what was thought a few days ago."

The Fed raised its benchmark short-term interest rate last week and indicated it had not decided whether it would likely bump the rate up again at its next policymaking meeting in June. Higher interest rates tamp down inflation by dampening consumer and business spending.

Fed Chairman Ben S. Bernanke told Congress in April that the central bank might leave rates unchanged at some point, even if there remained a risk of higher inflation. Analysts took that as a strong hint of a likely pause in June after two years of rate hikes.

But the April CPI report may make another rate hike more likely, particularly if the government reports similar inflation figures for May, analysts said today.

Stocks Skid On Inflation Worries
Consumer Prices Jump On Higher Gas, Clothing And Medical Costs

WASHINGTON, May 17, 2006

Consumer prices — propelled by higher gasoline, clothing and medical care costs — jumped sharply in April, stoking inflation fears and sending stocks tumbling.

It has been a tough day on Wall Street, with the Dow Industrials Average posting a triple-digit point decline. The other major averages are down more than one percent.

It was last week that investors were thinking the Dow might hit a new all-time high. Since then, it has suffered two triple-digit point declines, and that was before today's sell-off.

The 0.6 percent increase in the Consumer Price Index, the government's most closely watched inflation barometer, was the largest in three months, the Labor Department reported Wednesday. The rise came after a strong 0.4 percent advance in March.

Excluding energy and food products, which can swing widely from month to month, "core" prices went up by 0.3 percent in April for the second month in a row. The Federal Reserve and economists closely look at this core inflation reading to get a better sense of how other prices are acting.

The sizable increase in core prices especially fanned fears that rising energy costs may be starting to breed a broader bout of inflation throughout the economy.

"The needle is moving in the direction of higher inflation," said economist Ken Mayland, president of ClearView Economics. "This is not good news and suggests more companies are passing along their higher costs to consumers."

The latest readings on inflation were slightly worse than economists were expecting. Before the release of the report, 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.

Energy prices are now being factored into all commodities. This is going to hit us all in the pocketbook.