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The Honolulu Advertiser
Posted on: Saturday, March 17, 2007

Inflation jump puts Fed in bind on rates

By Martin Crutsinger
Associated Press

WASHINGTON — Consumers paid more for energy, food and a host of other items in February as a sluggish economy failed to extinguish inflation pressures. But in a hopeful sign for growth, factory output posted a better-than-expected increase.

The Labor Department reported yesterday that the Consumer Price Index rose by 0.4 percent last month, double the January increase, as energy prices shot up and adverse winter weather in Florida and California sent citrus prices soaring.

The increase was larger than the 0.3 percent rise analysts had expected, although core inflation, which excludes food and energy, rose by just 0.2 percent, in line with forecasts.

But even there, economists saw problems with widespread increases in a number of categories including clothing, housing, education and medical care.

"Underlying inflation remains stubbornly above the Federal Reserve's target, and these inflation figures put the Fed in a bind," said Mark Zandi, chief economist at Moody's Economy.com.

The Fed, which meets next Tuesday and Wednesday, would like to cut interest rates to give the sluggish economy a boost, analysts said, but the central bank cannot do so because of the stubborn persistence of inflation pressures.

In a separate report, output at the nation's factories, mines and utilities increased by 1 percent in February, led by a 6.7 percent surge in production of electricity and natural gas. The Fed report said this was the largest gain in utility output in 17 years and reflected colder-than-usual weather in February.

The widespread expectation is that Fed policymakers will leave interest rates unchanged.

Worries about a possible recession have been heightened by the recent turbulence in the stock market, brought on by fears of rising loan defaults for subprime mortgages taken out by home buyers with weak credit.

Zandi said he saw an increased possibility of a recession, agreeing with former Federal Reserve Chairman Alan Greenspan that the risk has now risen to about one-in-three. Greenspan's comments on the possibility of a recession this year contributed to the big selloff in stocks since late February.

The overall CPI reading was slightly bigger than expected, but it was still more moderate than a huge 1.3 percent surge in wholesale prices for February, a jump that was more than double what economists had been expecting.