Slowing Economy Isn't Cooling Prices

Bernanke and his colleagues are unlikely to raise interest rates because of one monthly inflation report but will if they see a series of similar reports in coming months, analysts said.

Fed policymakers forecast inflation to fall this year and next because of slower economic growth, cooled in large part by the slumping housing market. Recent data -- including flat retail sales, lower industrial production and plunging home construction in January -- show the economy is probably growing at a modest pace, around 2 percent a year, analysts said.

The Conference Board, a private business group, said yesterday that its index of leading economic indicators -- data such as building permits, consumer expectations and stock prices that hint at where the economy is heading -- rose slightly last month, by 0.1 percent. Analysts saw that as a sign that economic growth will keep to a modest pace in the months ahead.

Some of the price increases last month reflected temporary factors, such as crop freezes in California that boosted prices for some fruits and vegetables.

But analysts worried that some of the trends in the inflation report are likely to continue. Medical costs, for example, were 4.3 percent higher in January than a year earlier, and inflationary pressures in that sector are expected to continue as the aging U.S. population consumes more health care.

The increase in many food prices reflects federal efforts to encourage the production of ethanol as an alternative fuel, said Richard Yamarone, director of economic research at Argus Research. Higher demand for ethanol has boosted prices for corn, an ingredient in the fuel's production, as well as for other grains as farmers have shifted resources to produce more corn, he said. Corn is the main source of high-fructose corn syrup, a widely used ingredient in sweetened beverages and processed foods.

Yamarone said overall inflation is contained. But he forecast fuel prices to stay close to where they are now as food prices rise this year.

"You'll see people complaining less about their gasoline bills and more about their grocery bills," he said.

If inflation continues at this pace, workers may also complain about lagging pay. Average weekly earning for most workers fell 0.3 percent in January from the month before after adjusting for inflation, the Labor Department said in a separate report. These wages, paid to factory and non-managerial workers, were 2.1 percent higher last month than in January 2006, after adjusting for price changes.