Slowing Economy Isn't Cooling Prices

Rising Costs for Health Care, Food Bump Up Inflation

Prices for food and beverages rose 0.7 percent last month, contributing to an overall inflation increase of 0.2 percent. In the face of price growth, the Federal Reserve is expected to hold interest rates steady to see whether slowing economic growth will push inflation down. (By Daniel Acker -- Bloomberg News)

Inflation flared last month as rising prices for medical care, food and other items more than offset falling fuel prices, raising concern in financial markets that a slowing economy has not yet tamed price pressures.

Stock and bond prices fell after the Labor Department released its latest inflation figures, which convinced many investors that the Federal Reserve is not likely to cut interest rates any time soon and that it might have to raise them to subdue prices.

The department's consumer price index, a widely followed inflation gauge, rose 0.2 percent last month, as a 1.5 percent drop in fuel prices helped offset higher prices for many other goods and services.

The index was 2.1 percent higher than in January of last year -- a milder increase than the 2.5 percent rise for all of 2006. That's consistent with other recent data suggesting that overall, the economy has cooled.

But investors saw ominous trends in the details. Prices for gasoline and fuel oil tumbled last month because of falling crude oil prices, as natural gas prices fell because of unseasonably warm weather. Both trends have reversed in February, suggesting inflation will be higher this month.

And because oil prices swing so much, economists seek signs of underlying inflation by studying so-called core measures, which exclude volatile food and fuel prices. The department's core consumer price index jumped 0.3 percent in January -- the largest monthly increase since June. That left core prices 2.7 percent higher than a year earlier.

The higher core inflation resulted primarily from a rapid 0.8 percent increase in medical costs, including prices for prescription drugs, hospital care and visits to physicians' offices.

Food prices rose 0.7 percent in January, the biggest increase since April 2005. Airfare and hotel room rates climbed. Prices also increased for electricity, water, and sewer and trash collection, the department said.

"Inflation is not yet under control," Bernard Baumohl, managing director of the Economic Outlook Group, told clients. "Clearly this is not what the Fed wants to see."

Fed Chairman Ben S. Bernanke told Congress last week that the central bank is likely to hold interest rates steady for a while to see whether slowing economic growth nudges inflation lower.

Inflation pressures have eased in recent months, but the monthly figures can jump around, so it will be "some time before we can be confident" that price pressures will continue to ease as the Fed forecast, Bernanke said.

He stressed that inflation remains too high, and Fed policymakers worry that it may climb higher. They are prepared to increase interest rates if necessary to force inflation lower, he said.