000355 Consumer Prices Jump in February

Washington - A record rise in fuel oil prices along with a steep increase in gasoline costs drove up consumer prices by 0.5% in February -- the biggest monthly gain since last April. Economists said the news justifies a widely expected boost in interest rates next week by the Federal Reserve to keep inflation under control.

The jolt in the Consumer Price Index, the most closely watched inflation gauge, came from a huge 4.6% increase in energy prices, the biggest jump in 10 months, the Labor Department said Friday. It was a slightly worse showing on inflation than many analysts were anticipating.

But outside the volatile energy and food categories, prices were mostly well-behaved. The “core” rate of inflation rose a mild 0.2% in February, the same-sized gain recorded in January and was right on target with many analysts' expectations, something that heartened some economists and investors.

On Wall Street, the Dow Jones stock average pulled back from an earlier surge and fell into negative territory as some investors cashed in on Thursday's record-setting 499.19-point gain. The Dow closed down 35.37 points to 10,595.23, but still ended the week with a gain of 666.41 points, a 6.7% increase. The Nasdaq finished the day higher.

First Union's chief economist, David Orr, summed up Friday's report as “a tale of two CPI's: one awful, the other one tame.”

It's a distinction that may be lost on average consumers, who are paying higher prices at the gasoline pump to drive to work and shelling out more to heat their homes, economists acknowledged.

“The truckers and New England homeowners scoff at the economists who say inflation is still well-contained despite the spike in energy prices,” Orr said.

Consumers, however, shouldn't worry that the country is heading down a path toward the high inflation seen in the 1970s, economists said.

“We are absolutely not heading in that direction,” said Stephen Cecchetti, economics professor at Ohio State University. “In the '70s, the increases in consumer prices were across the board. They were everywhere. In today's and other recent (CPI) reports, the increases in prices were not broad-based at all. There's not much to worry about here.”

The Federal Reserve has boosted interest rates four times since June to slow the supercharged economy and keep inflation from escalating. Many analysts expect the Fed will raise rates for a fifth time Tuesday and said the CPI report justifies such a move.

“The Fed has to do something and it will next week,” said economist Joel Naroff of Naroff Economic Advisors.

The 0.5% rise in consumer prices last month, following a modest 0.2% increase, was the biggest monthly gain since a 0.7% increase posted in April.

A whopping 34.6% gain in fuel oil prices -- an all-time monthly high -- propelled overall consumer prices higher last month. So did a 6.3% rise in gasoline prices, the largest gain since April. Natural gas prices rose by 1.7%, the biggest increase since September, while electricity prices went up by 0.8%, the largest increase since July 1997.

Production limits by oil-producing nations and increased demand because of the winter weather accounted for the rise in energy costs.

Labor Secretary Alexis Herman said she would “watch the extent to which higher energy prices are being passed on to consumers” but said that outside of the energy sector, inflation was quiet.

Higher energy bills took their toll on airfares, which rose 3.8% in February, the sharpest gain since October. Transportation prices, also reflecting more expensive fuel costs, rose 1.3%, the biggest increase since April.

Crude oil prices hit the $34-a-barrel mark on March 8, the latest in a series of nine-year highs. In many places, gasoline prices have edged close to $2 a gallon. But there's been rumblings that the oil-producing nations will raise output, something that would push prices down.

Food prices, meanwhile, rose a sizable 0.4%, the largest increase since October 1998, as rising prices for beef, pork and fresh fruits more than offset falling prices for poultry and fresh vegetables.

Elsewhere in the report, tobacco products, including cigarettes, rose a sharp 2.1%, the largest increase since September, reflecting companies bumping up cigarette prices to pay settlement costs for tobacco lawsuits.

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