Energy Costs Continue To Swell

Consumer Price Index Rise Is Highest of Year

Energy costs continued to surge in May, but underlying inflation remained tame -- positive news for policymakers worried about the corrosive effect of rising prices in a slower-growing economy.

New Labor Department data showed energy prices jumped 5.4 percent in May from the previous month. That pushed the consumer price index up 0.7 percent on a seasonally adjusted basis, the largest monthly increase in nearly two years. The index grew 0.4 percent on a seasonally adjusted basis in April.

Core inflation, which excludes volatile food and energy costs, rose just 0.1 percent, seasonally adjusted, and over the past year has risen a modest 2.2 percent.

In contrast to quickly rising energy costs, prices for clothing fell 0.3 percent, while prices for housing showed a modest 0.2 percent increase, reflecting the country's soft real estate market.

The report "underscores the willingness for producers to absorb higher costs into profit margins, as soaring energy prices have yet to embed themselves into core prices," Kenneth Beauchemin, U.S. economist with the consulting firm Global Insight, wrote in an analysis.

Yesterday's inflation report is another piece of encouraging economic news to counterbalance recent concerns about price increases globally and continued tumult in the housing and mortgage markets. The Mortgage Bankers Association said Thursday that mortgage defaults in the United States in the first three months of the year were the highest in at least 50 years, a trend many analysts expect to continue.

By contrast, the Commerce Department said Wednesday that retail spending surged in May, diminishing fears that rising energy costs and trouble in the housing market would cause consumers to pull back and undercut one of the country's economic mainstays. In addition, anecdotal information from the Federal Reserve released this week indicated that economic growth has picked up recently after slowing at the start of the year.

Separately, the Commerce Department said yesterday that the deficit in the current account balance, the broadest measure of foreign trade, increased by 2.5 percent, to $192.6 billion in the January-to-March period compared with $187.9 billion in the fourth quarter, reflecting higher foreign oil imports.

Investors, cheered by the consumer price index numbers, boosted the Dow Jones industrial average more than 100 points in the opening minutes of trading. The Dow, the Standard & Poor's 500 and the Nasdaq composite index all gained more than 0.6 percent yesterday.