Consumer Prices in U.S. Increase More Than Forecast

Consumer prices in the U.S. rose more than forecast in January, indicating that the faltering economy hasn't alleviated inflation pressures.

The 0.4 percent increase in the cost of living matched the gain in December, the Labor Department said today in Washington. Excluding food and energy, prices rose 0.3 percent, after a 0.2 percent climb a month earlier, leading the so-called core rate to the biggest increase since June 2006.

A jump in food and energy costs, rents and clothing prices led the index higher last month. The report underscores that Federal Reserve policy makers can't set aside inflation concerns as they weigh more interest-rate cuts to prevent a recession.

Inflation is uncomfortably high, Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview with Bloomberg Television. Once the U.S. economy looks like it's started to stabilize, the Fed will be raising rates back up to neutral, because inflation is not going away, she said.

A separate report today showed that housing starts in the U.S. stayed near the lowest level since 1991 last month. Work began on 1.012 million homes at an annual rate, up 0.8 percent from December, the Commerce Department said. Building permits dropped 3 percent to 1.048 million, a 16-year low.

Treasury securities dropped, with 10-year note yields rising to 3.93 percent at 9:11 a.m. in New York from 3.90 percent late yesterday.

Economists' Forecasts

Economists forecast the consumer price index would rise 0.3 percent, according to the median of 74 projections in a Bloomberg News survey. Estimates ranged from an increase of 0.1 percent to one of 0.4 percent.

Core consumer prices were forecast to rise 0.2 percent, according to the Bloomberg News survey. Estimates ranged from a gain of 0.1 percent to an increase of 0.3 percent.

Energy prices last month increased 0.7 percent, after rising 1.7 percent the previous month. Fuel costs were up 4.5 percent.

Food prices, which account for about a fifth of the CPI, rose 0.7 percent. Apparel prices rose 0.4 percent after a 0.1 percent increase in December.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

Rate Cuts

Some bond investors are concerned that the Fed's interest- rate cuts, totaling 2.25 percentage points since September, threaten to stoke inflation. The reductions came at a time of rising energy and commodity costs, and a falling U.S. dollar.

The trend is showing elevated levels of inflation above where the Fed would like it to be, said Don Alexander, director of fixed income in New York at Citigroup Global Wealth Management, which oversees about $1.3 trillion in assets. You're not rewarded for taking the risk of investing in longer-dated Treasuries, he said.

A measure of price expectations derived from the gap in yields between 10-year notes and 10-year Treasuries linked to inflation rose to 2.39 percent today from 2.20 percent last month.

Still, Fed Chairman Ben S. Bernanke and other officials this month indicated that price expectations have yet to reach a level triggering their concern. The Fed chief told lawmakers Feb. 14 that inflation expectations appear to have remained reasonably well anchored.

Most Since 1990

Citing a worsening economic outlook, the central bank last month lowered its benchmark interest rate by 1.25 percentage point during two meetings, the fastest rate reduction since the federal funds rate because the main policy tool around 1990.

Compared with a year earlier, consumer prices rose 4.3 percent, more than the 4.1 percent gain reported for December. The so-called core rate was up 2.5 percent from January 2007, the biggest jump since March 2007, compared with a 2.4 percent increase for all of 2007.

Rents, which make up almost 40 percent of the core CPI, rose 0.3 percent.

Slower economic growth may help damp price pressures.

Economic growth slowed to a 0.6 percent pace in the fourth quarter and the economy lost jobs in January for the first time in more than four years, according to government figures.

Wal-Mart

Wal-Mart Stores Inc., the world's largest retailer said yesterday that fourth-quarter profit rose more than analysts had forecast after it stepped up U.S. holiday discounts and boosted sales in Asia and Latin America. Before the holiday season the company made price cuts on 20 percent more items and, last month, it marked down groceries, medicine, fitness equipment and electronics as much as 30 percent.

The government said Feb. 15 that prices of goods imported into the U.S. jumped 1.7 percent in January, pushed up by higher costs for energy and food. The producer price index is scheduled to be released Feb. 26.

PPI and CPI have some differences in timing that may cause discrepancies. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.