Feeling the Pinch of Higher Prices

With Inflation Up Sharply in February, Chances Dwindle for Rate Cut by the Fed

Consumers like these at an Acme supermarket in Lawrenceville, N.J, paid more last month for fruits and vegetables because of frosts that damaged crops. (By Mel Evans -- Associated Press)

Inflation quickened last month as consumers paid higher prices at the gasoline pump, the grocery store, clothing shops and the doctor's office, while wages lagged, the Labor Department reported yesterday.

The report added to other recent signs that many Americans are struggling to pay their bills as prices rise, economic growth slows and interest rates jump on many adjustable-rate mortgages.

The department's consumer price index, a widely followed inflation gauge, rose 0.4 percent in February, twice as fast as in January.

Prices rose faster than wages in February, for a second consecutive month. Average weekly earnings fell 0.3 percent last month, after adjusting for inflation, as they did in January, the Labor Department said in a separate report.

"Consumers feel inflation is still a problem," said Gina Martin, an economist with Wachovia Corp. "Their daily expenses are higher."

Wall Street was rattled earlier in the week by news that more homeowners fell behind on their mortgage payments or lost their homes to foreclosure at the end of last year, largely those borrowers with adjustable-rate loans. With home construction, retail sales and business spending also declining, many investors raised their bets that the Federal Reserve might ride to the rescue by cutting interest rates soon.

The new inflation figures doused such hopes yesterday, making it likely that Fed policymakers would leave borrowing costs on hold when they meet next week. In recent months, the Fed has been more worried about inflation than the sluggish housing market or cooling economic growth.

The Fed is in a bit of a box. If policymakers raise interest rates to curb price increases, that would make it harder for borrowers to make their mortgage payments or refinance their loans. If the Fed cuts rates, that might spur inflation.

Many economists, including those at the Fed, still see most of the economy -- outside the housing and automobile industries -- as healthy, with the soft spots offset by low 4.5 percent unemployment and steady growth in health care, education, finance, travel and other service industries. A separate Fed report released yesterday showed the nation's industrial production, which is the output of factories, utilities and mines , jumped last month, another bright spot.

The economy's sources of strength, however, are enabling businesses to increase prices. Airline fares, hotel room rates, medical bills and tuition costs all rose briskly last month. Clothing prices increased with the introduction of spring and summer fashions, with women's apparel prices rising most sharply.

Consumers also paid more for fuel oil and natural gas to warm their homes during the colder weather last month, and swallowed higher prices for fruit and vegetables that had survived recent frosts. And higher crude oil prices pushed gasoline pump prices higher.

Economists seek a sense of underlying inflation by looking at "core" measures, which strip out volatile food and energy prices. The Labor Department's core consumer price index rose 0.2 percent last month, down from a 0.3 percent increase the month before.

Core prices were 2.7 percent higher in February than a year before, the same annual rate as in January. That was down from a recent peak of 2.9 percent in the year ended in September, but too high for the Fed's comfort.

"Inflation is not as bad as it was before, but not ideal," Martin said.

Fed Chairman Ben S. Bernanke and his colleagues have hoped the surge in inflation last year would prove temporary, the result of swings in oil prices and a passing surge in rental-housing prices. Demand for rentals shot up last year as many people found they could not afford to buy high-priced homes.

Rents play a major role in the Labor Department's calculation of the consumer price index, and rising rents were a significant cause of last year's higher inflation.

Bernanke told Congress last month that the contribution to inflation from rental prices should moderate this year. But two different rent measures rose quickly in February, providing no relief from other price increases.

"The Fed is probably not surprised, but they're disappointed" by inflation's persistence, said Peter E. Kretzmer, senior economist at Bank of America Securities. "They cannot feel as if they can relax at this point, and that things are moving in the right direction."