Inflation, Consumer Prices Rise in January

By Howard Schneider
Washington Post Staff Writer
Wednesday, February 20, 2008; 4:09 PM

Inflation accelerated in January as the rising cost of energy, food and transportation led price increases across a broad array of goods and services, complicating the efforts of federal policymakers trying to battle a slowing economy.

Housing starts, meanwhile, increased slightly in January, but permits for future building declined, signaling a continued downturn.

On the day after oil closed at a record high of more than $100 a barrel, new federal data show that overall prices rose 0.4 percent in January compared to the month before, on a seasonally adjusted basis. The consumer price index was 4.3 percent higher last month compared with January a year ago.

While the largest monthly price increases were for energy and food, the cost of all other goods -- so-called core inflation -- rose 0.3 percent in January.

That was faster than analysts expected, and a potentially troubling sign for Federal Reserve and other officials who recently approved lower interest rates, tax rebates and other measures to try to stimulate economic growth.

On Wall Street, the Dow Jones industrial average was down by about 70 points after the first half-hour of trading, and other major indexes were also lower. Stocks closed the day higher, though: The Dow was up 92.64, to 12,429.86; the Nasdaq was up 20.90, to 2,327.10; and the S&P 500 was up 11.31, to 1,360.09.

The central bank's next meeting on interest rates is in mid-March. The Fed has reduced interest rates sharply this year, as signs of an economic slowdown -- and possible recession -- accumulated, and trouble in the housing and financial sectors deepened.

While Fed chairman Ben S. Bernanke told congressional leaders recently that risks to economic growth remain, a surge in inflation may limit the bank's willingness to cut rates further, Ian Shepherdson, chief U.S. economist with the High Frequency Economics consulting firm, wrote this morning in an analysis of the latest inflation report.

"One bad month does not make a trend . . . But right now the optics are unfavorable and this report will make it much easier," for the Fed to restrict its next interest rate cut to a quarter of a point, Shepherdson wrote.

In January, the bank reduced interest rates by three-quarters of a percentage point -- a large reduction by historical standards -- and followed that a week later with a half-point cut.

Ideally, inflation and economic growth move inversely -- with a slowing economy translating into less demand for goods and services, and thus less pressure on prices. In such a situation, the Fed can try to stimulate demand by lowering interest rates, making it cheaper for businesses and households to borrow money. But when slow growth accompanies rising inflation, policymakers may feel that controlling prices is more important, and become hesitant to cut rates or take other steps to stimulate demand.

The continued trouble in the housing industry follows months of similar news. January housing starts did increase by 0.8 percent -- but only after a particularly steep drop in December. In addition, Shepherdson noted, the increase was largely driven by multifamily home construction, while single-family housing starts fell more than 5 percent.

In addition, building permits, a barometer of future activity, fell 3percent to 1.048 million, the lowest level since the early 1990s.

"There is no sign whatever of any easing in the rate of decline," Shepherdson wrote.

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