000637 Consumer Prices Inched Up 0.1% in May

Washington - Consumer inflation edged up a smaller-than-expected 0.1% in May as lower costs for gasoline helped blunt the biggest jump in food prices in more than 18 months. Still, a new survey by the Federal Reserve found scattered signs of “worsening price inflation.”

The tiny advance in the Consumer Price Index, the most closely watched inflation gauge, came after consumer prices showed no change in April, the Labor Department said.

Economists believed that the report based on surveys taken early in the month did not capture energy price increases, particularly for gasoline, that came later in May. As a result, June's CPI report is likely to show large jumps in gasoline and other energy prices, analysts said.

Outside of the volatile energy and food categories, the “core” rate of inflation rose for the second month in a row by 0.2% in May, matching many analysts' expectations.

In its survey, the Fed said “indications of worsening price inflation, while not widespread, (were) reported by several districts.” The survey cited higher raw material prices for such things as petroleum-based products, natural gas, metals, paper and some construction materials.

The survey also said that while the economy grew solidly in April and May, there were “signs of some slowing from the rapid pace earlier in the year.”

While employers are continuing to report shortages of workers and having difficulty hiring and recruiting people, the Fed said that such labor market tightness has not intensified. Also, retailers in Boston, New York, Atlanta, Chicago, Kansas City and San Francisco said wage inflation had not shown up in higher product prices.

The survey, compiled from reports from its 12 regional banks, will be used when Fed policy-makers meet June 27-28 to review their stance on interest rates. The report was based on information collected before June 6.

Since last June, the central bank has raised interest rates six times to slow the speeding economy and keep inflation under control.

Some recent economic reports also have suggested the economy is slowing. While economists have offered mixed opinions on whether the Fed will push up rates again later this month, a growing number believe the odds are greater that the Fed will stay on the sidelines. They cited the CPI report as bolstering their case.

The Fed's survey of economic conditions around the country offered ammunition for economists on both sides.

Analysts arguing that rates will go up again in June cited the Fed's mention of scattered reports of worsening price inflation and the continued tightness of the labor market. Economists fear employers will recruit scarce workers with big increases in wages and benefits, which could be passed through in the form of sharply higher retail prices.

“The Fed seems to be saying we haven't escaped the jaws of inflation yet,” said Richard Yamarone, economist with Argus Research Corp.

Those who believe the Fed will not raise rates later this month pointed to information in the report that there were signs of slowing in the economy, including fewer home sales in more than half of the districts. They also noted that the survey said despite the tight labor market, base wages of permanent workers are not accelerating in most areas.

“The report suggests the Fed can afford to hold monetary policy unchanged, but policy- makers will be vigilant and biased toward more tightening in the future given the state of the labor market,” said Mark Zandi, chief economist for RFA Dismal Sciences.

On Wall Street, the Dow Jones was up 53 points, but the Nasdaq lost 40 in afternoon trading.

So far this year, consumer prices have been rising at an annual rate of 3.6%, compared with 2.7% for all of 1999. The pickup in this year's prices came from rising energy costs.

In May, however, energy prices fell for the second straight month by 1.9%. Prices for gasoline declined 3.5%, fuel oil by 1% and electricity by 0.4%. Natural gas prices rose 0.7%.

Food prices rose 0.5% in May, the biggest increase since October 1998. Rising prices for vegetables, beef and poultry swamped falling prices for fruits and dairy products.

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