Inflation Jumps on Fuel, Energy Costs
Rise May Force Fed To Forgo New Rate Cuts

By Howard Schneider
Washington Post Staff Writer
Saturday, December 15, 2007

Consumer prices increased by their fastest pace in more than two years in November, cutting into wages and raising the likelihood that the Federal Reserve will hold off on further interest rate cuts even as the economy slows.

New figures announced by the Labor Department yesterday showed that overall prices surged 0.8 percent in November on a seasonally adjusted basis, the biggest monthly increase since September 2005.

The cost of fuel, driven by rising crude oil prices, was the chief culprit. Energy costs increased 5.7 percent in November and have increased at a 33 percent annual rate in the past three months.

Core inflation, which excludes energy and food costs, rose more quickly than expected, with prices for transportation and clothing increasing. Transportation costs, which had fallen for three of the past five months, rose by 2.9 percent in November; clothing prices, down for much of the year, rose 0.8 percent.

The report, and concern over the Federal Reserve's possible reaction, sent the three major stock indicators down about 1.3 percent.

The inflation report was bad news for investors and analysts hoping that the Fed would continue cutting interest rates into next year. The Fed trimmed rates by a quarter of a percentage point on Tuesday, the third straight reduction it has made in response to a slowing economy and the crisis in the mortgage and credit markets.

With the central bank trying to strike a balance between stimulating the economy and making sure prices do not increase too quickly, this week's round of inflation data may tip the balance away from further rate cuts, said Bernard Baumohl, managing director of the Economic Outlook Group.

Lower interest rates make it cheaper for businesses and consumers to borrow money, and encourage them to spend, which generates economic growth. That, however, can cause prices to rise, and the Fed considers the control of inflation a top priority.

"There is now evidence price pressures are spreading even in the non-food and energy sectors of the economy. That's precisely what the Fed has sought to prevent," Baumohl said.

In the past three months, overall prices have increased at a 5.6 percent seasonally adjusted annual rate, Baumohl said. That has more than offset the monthly increase in average hourly wages and pushed real spending power down for two months in succession.

In an interview broadcast Friday on National Public Radio, former Fed chairman Alan Greenspan said the likelihood of a recession is "clearly rising" and the economy is "getting close to stall speed," the Associated Press reported.

At the same time, comments from top central bankers in Europe yesterday cast doubt on whether a Fed plan to ease a world credit crunch was working.

The Fed on Wednesday announced a partnership with Canadian and European central banks to make billions of dollars available on favorable terms to U.S. and European financial institutions to encourage them to loan more money to each other. Interbank lending is a key lubricant of the global financial system, but it has slowed to a crawl because of the subprime mortgage crunch.