Inflation fears likely to bring rate increase

By Jeannine Aversa
Associated Press

WASHINGTON — Inflation appears to be stirring from its hibernation. Consumer prices are advancing in the first four months of this year at a pace twice as fast as the increase for all of 2003.

That in turn is increasing chances that the Federal Reserve will raise interest rates next month, according to a growing number of analysts. They point to a string of economic reports, from sizable gains in the nation's payrolls to brisk manufacturing activity, that paint a picture of an economic resurgence that is beginning to fan inflation.

"The economy is just taking off and is taking inflation with it," said Mark Zandi, chief economist at Economy.com. "I think it is just too much for the Fed to ignore, and they will have to tighten policy in June."

From January to April, consumer prices rose at a seasonally adjusted annual rate of 4.4 percent, compared with a 1.9 percent increase for last year, the Labor Department reported yesterday. This year's pickup has been led by sharply higher energy prices, especially for gasoline.

The core rate of inflation, from which energy and food prices are excluded, has risen so far this year by 3 percent, outpacing the 1.1 percent rise for 2003.

"Inflation is peeking out from underneath the covers," said Bill Cheney, chief economist at MFC Global Investment Management, though economists don't view the price acceleration as particularly worrisome at this point.

In other economic news yesterday, the Federal Reserve reported that industrial production jumped by 0.8 percent in April, the biggest increase since November, up from a 0.1 percent dip in March.

The Commerce Department said businesses boosted their inventories by 0.7 percent in March, a sign that companies feel more confident in the recovery's staying power. Business sales rose by 2.9 percent in March.

The Dow Jones industrials, meanwhile, edged up 2.13 points to close at 10,012.87.

On inflation, some companies, which have had to keep a lid on price increases during the economic slump, are finding it easier to raise prices now that the economy is rebounding. Wholesale prices in April posted their biggest increase in a year, the government reported Thursday.

While recent economic reports show inflation moving higher, Federal Reserve Chairman Alan Greenspan and his colleagues indicated at their meeting last week they are not yet worried.

"Long-term inflation expectations appear to have remained well contained," they said in their report of the session.

Thus, the Fed decided to hold short-term interest rates at a 46-year low of 1 percent, unchanged since last June. The central bank signaled, however, that rates could move higher now that the economic recovery has firm roots.

An increasing number of economists now believe the Fed will begin raising rates at its next meeting June 29 to 30.