Tuesday, February 22, 2011

Consumer Price Rise in U.S. Tops Forecast on Food, Fuel Costs

U.S. Economy: Consumer Prices Rise More Than Forecast

Rising global demand for food and fuel pushed up the U.S. cost of living more than forecast in January, a sign the risk of a damaging drop in prices is ebbing.

The consumer-price index advanced 0.4 percent for a second month, led by the biggest increase in food costs in more than two years, according to figures today from the Labor Department in Washington. Other reports showed manufacturing is bolstering the expansion, and consumer confidence is being buffeted by rising household expenses.

Americans are paying more for air travel and clothing as growing economies in Asia and Latin America boost demand for commodities like oil and cotton. Another report today showing more people than projected filed claims for jobless benefits last week indicates workers don’t have the power to seek bigger pay increases, evidence inflation is unlikely to flare.

“You’re seeing some pass-through of commodity costs in a few areas like airline fares, tires and clothing, but it’s still pretty muted,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “For an upward spiral in CPI, we need to see wage inflation start to accelerate, and that’s not in the cards.”

Treasury securities climbed as the increase in applications for unemployment benefits showed the labor market will take time to recover. The yield on the benchmark 10-year note, which moves inversely to prices, dropped to 3.57 percent at 5 p.m. in New York from 3.62 percent late yesterday.

Exceeds Forecast

Consumer prices were projected to rise 0.3 percent last month based on the median forecast of 79 economists surveyed by Bloomberg News. Estimates ranged from increases of 0.2 percent to 0.5 percent.

Over the past 12 months, costs climbed 1.6 percent.

Energy costs increased 2.1 percent in January from a month earlier and rose 7.3 percent for the prior 12 months, today’s report showed. Food prices rose 0.5 percent last month, the biggest gain since September 2008, and were up 1.8 percent for the 12-month period.

The so-called core rate, which excludes volatile food and fuel prices, rose 0.2 percent, the biggest gain since October 2009. These expenses increased 1 percent from January 2010, compared with a record-low 0.6 percent year-over-year gain as recently as October.

Core inflation was boosted by a 1 percent increase in the cost of clothing, the most since February 2009, and a 2.2 percent rise in airline fares.

Higher Fares

AMR Corp.’s American Airlines boosted round trip fares $20 on most of its domestic routes in December, a move later matched by Delta Air Lines Inc., according to Farecompare.com. The fare comparison web site also said United Continental Holdings Inc. added a $20 round-trip peak travel day surcharge to fares on future travel dates.

“You’re going to see more companies that attempt to pass through” higher costs, said Tom Porcelli, chief U.S. economist at RBC Capital Markets Corp. in New York, who correctly forecast the gain in core prices. “How successful they are depends on the economic backdrop. We’re looking at a slightly firmer inflation backdrop.”

Another Labor Department report showed applications for jobless benefits increased by 25,000 to 410,000 in the week ended Feb. 12, exceeding the 400,000 median forecast of economists surveyed by Bloomberg.

Fed View

Federal Reserve policy makers took a more optimistic view of the U.S. economy last month while maintaining their dissatisfaction with job growth as they pressed forward with an expansion of record monetary stimulus, minutes of last month’s policy meeting released yesterday showed.

Even with soaring commodity costs, the Fed remains concerned that consumer inflation is below its long-range annual target of 1.6 percent to 2 percent.

“Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer-run inflation expectations were stable,” the minutes said.

The CPI report showed average hourly wages adjusted for inflation dropped in each of the past three months, and were up 0.2 percent since January 2010, the smallest year-over-year gain since a drop in the 12 months ended May.

“To the extent that we’re getting commodity prices passed through while wage inflation is really low, it squeezes real income for consumers,” said IHS Global Insight’s Gault.

Consumer confidence last week held near a two-month low, and more Americans turned pessimistic on the outlook for the economy as gasoline prices rose, another report showed today.

Flagging Confidence

The Bloomberg Consumer Comfort Index, formerly the ABC News US Weekly Consumer Comfort Index, was minus 43.4 in the period to Feb. 13 compared with minus 46 the prior week. Twenty-nine percent of those surveyed said the economy will worsen, the most since November and up from 23 percent in early January.

Also today, manufacturing in the Philadelphia region expanded in February at the fastest pace in seven years, underscoring factories’ contribution to the economic expansion.

The Fed Bank of Philadelphia’s general economic index rose to 35.9, the highest level since January 2004 and exceeding the median forecast of 21 in a Bloomberg News survey of economists. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

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