Factory output, inflation both rise

By Jeannine Aversa
Associated Press

WASHINGTON — The economy chugged ahead on the comeback trail, with production by U.S. industry posting the biggest gain in nearly two years. But inflation crept higher, reflecting a worrisome spurt in oil prices, a potential pothole for recovery.

The Federal Reserve reported yesterday that output at the nation's factories, mines and utilities jumped 0.7 percent in March after a solid 0.3 percent gain — a sign the turnaround in the manufacturing sector is gaining momentum. It marked the third straight monthly increase.

That's good news for the national economy and for America's manufacturers, which saw hundreds of thousands of jobs evaporate during the recession.

Though the budding economic revival isn't causing a run-up in consumer prices, soaring oil costs are a concern. A dramatic increase could slow or derail the recovery.

The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose 0.3 percent in March after a 0.2 percent advance. Virtually all the pickup came from energy prices, which shot up 3.8 percent, the biggest increase in 10 months.

Tensions in the Middle East were a key force behind the increase. Oil prices retreated last week, only to flare again this week, stoked by uncertainties in Venezuela, the world's fourth-largest oil exporter.

While many economists are hopeful energy prices will moderate, they acknowledge that soaring energy costs are a potential Achilles heel for the economic recovery.

Economists said the odds are growing that the Federal Reserve may leave short-term interest rates — now at 40-year lows — unchanged into the summer.

"In general, higher oil prices are a bad thing for the economy. They represent a very real cost to the U.S. that feeds through the whole economy," said Bill Cheney, chief economist at John Hancock.

Out-of-control energy prices would cause consumers to lose confidence and retrench, snuff out a manufacturing comeback and send corporate profits tumbling.

Gasoline prices went up 8 percent in March, the largest advance in six months, reflecting higher oil costs and stronger demand. Fuel oil prices rose 2.2 percent, the biggest increase since December 2000, and natural gas prices increased 0.8 percent.

Food prices rose 0.2 percent for the second month in a row.

But excluding volatile energy and food prices, the core rate of inflation moderated, rising just 0.1 percent last month, down from a 0.3 percent increase. That suggested most other prices were remaining well-controlled.

Prices for new cars and trucks, computers and telephone charges actually fell, providing shoppers with some bargains.

Competition, low-priced imports and signs that consumers who kept buying through the recession don't have a lot of pent-up demand are restraining price increases for some goods, economists said.

Medical costs continued to rise, by 0.4 percent in March.