Inflation concerns arise as March consumer prices jump

Jeannine Aversa

Wednesday, April 14, 2004 | 9:03 a.m.

WASHINGTON -- Consumer prices -- lifted by more expensive gasoline, airfares and clothing -- rose by 0.5 percent in March, raising questions about whether the seeds of unwanted inflation are being sown.

The increase in the Consumer Prices Index, the government's most closely watched inflation barometer, followed a 0.3 percent advance in February and matched the rise registered in January, the Labor Department reported today.

Excluding energy and food costs, "core" consumer prices rose by 0.4 percent in March -- the biggest increase since November 2001. The March rise came after core prices went up by just 0.2 percent in January and February.

The increases in both the overall CPI and core inflation were larger than economists were forecasting. They had been predicting a modest 0.3 percent advance overall for consumer prices and another 0.2 percent increase in core prices.

"The report signals that inflation is headed higher," said Mark Zandi, chief economist at Economy.com. "It is clear that inflation is no longer slowing and there is mounting evidence that it is beginning to accelerate, but it is still very low."

Zandi said he doesn't foresee inflation taking off in the near term because there are still parts of the economy, namely the jobs market, that have yet to fully heal and manufacturers and other businesses are still operating below capacity.

In other economic news, the U.S. trade gap narrowed to $42.1 billion in February, representing a 3.2 percent decline from January's record high deficit, the Commerce Department reported. The improvement came as U.S. exports of goods and services grew strongly and outpaced the rise in imports.

With the economy rebounding, some companies are beginning to have a greater ability to raise product prices, economists say. Rising energy costs in some cases are being passed along to consumers in the form of higher prices, analysts say.

As the economy was struggling over the last three years to get back to full throttle, many companies found it difficult to raise prices. That has created a climate where inflation hasn't been a threat to the economy.

The long period of tame inflation is why Federal Reserve policy-makers have been able to leave short-term interest rates at a 45-year low of 1 percent since last June.

Fed Chairman Alan Greenspan and his colleagues, however, have put consumers, investors and businesses on notice that rates can't stay at such super-low levels indefinitely. But they haven't said when the Fed might start pushing rates up.

Some economists believe higher rates could come later this year and a few worry that such super-low rates in combination with a rebounding economy could be the right mix for new, unwanted inflation. Zandi believes Wednesday's inflation report solidifies the case for an August rate increase by the Fed.

Others economists, however, don't foresee the Fed raising rates until 2005 and are less concerned about the prospects of an inflation flare up.

Most analysts agree, however, that the Fed probably will hold rates steady at its next meeting in May.

In March, energy prices rose by 1.9 percent, following a 1.7 percent advance. The increase in energy prices last month reflected a 5.5 percent jump in gasoline prices.

Strong demand and tight supplies have pushed up energy prices. Looking ahead, analysts believe prices could climb higher, especially in light of a recent decision by the Organization of Petroleum Exporting Countries to cut its oil output target.

Airfare prices rose by 1.1 percent in March and clothing prices increased 0.9 percent.

Food prices increased by 0.2 percent for the second month in a row. Falling prices for beef and veal, and vegetables helped to temper rising prices for pork, poultry, fruits and dairy products.

Medical care costs, meanwhile, went up by 0.6 percent and prices for college tuition and fees rose by 0.8 percent last month- both categories have been sore spots for consumers.