Consumer prices rose and factories increased production in April, according to two government reports released yesterday, further evidence that the U.S. economy is improving and inflation is rising.
The consumer price index, a broad measure of inflation, rose a seasonally adjusted 0.2 percent in April, the Labor Department reported, part of a 2.3 percent increase in what consumers pay for goods and services over the year ended that month. In a separate report, the Federal Reserve said industrial production rose a seasonally adjusted 0.8 percent in April, after contracting slightly in March.
The reports suggest that the nation's beleaguered manufacturing sector is joining an economic recovery that has largely been driven by service firms, and that as the expansion broadens, prices consumers pay are going up. Rising inflation is one of the reasons analysts now consider it very likely that the Federal Reserve will raise its benchmark federal funds rate when it meets in June.
"I don't think inflation is going to increase dramatically," said Mickey D. Levy, chief economist for Banc of America Securities. "But there's clearly a new trend in place of increasing inflation pressure, both for producers and consumers."
In broad categories of spending, the sharpest price increases in April were for housing, 0.4 percent, and medical care, also 0.4 percent. Food prices overall rose 0.2 percent, though prices of dairy products were up 1.6 percent. But particularly striking to economists was how broad the rise in prices was; prices fell on few goods.
Consumer prices, excluding those for volatile food and energy items, called core inflation, were up 0.3 percent in April. Energy prices have risen sharply this year, but were up a modest 0.1 percent in April after rising 1.9 percent in March. One factor in the surprisingly slight reported consumer energy price increase was the adjustment process by which the Labor Department evens out regular seasonal features in the statistics. In absolute terms, for example, gasoline prices rose 3.7 percent in April, but when adjusted for the usual increase in fuel prices as people hit the roads in higher numbers, prices were down 0.3 percent.
According to the producer price index, released Thursday, wholesale gasoline prices rose 3.4 percent in April, and the price of crude oil is rising on commodity exchanges. With those trends afoot, some economists expect the May inflation figures to reflect a more substantial increase in energy prices.
The continued rise in consumer prices is likely to concern the Federal Reserve, analysts said, particularly with sharp rises in producer prices that could eventually be passed on to consumers. Some analysts who a few weeks ago thought the Fed would wait until late summer or fall to raise interest rates now believe it will do so in June.
"We thought it would be in August," said John E. Silvia, chief economist of Wachovia Corp. "But looking at the data, it's too one-sided, all pointing to higher inflation."
Part of the reason for that direction is an economic recovery that appears to be broadening, based on yesterday's industrial production report and other data. Manufacturing output, the largest component of industrial production, was up 0.7 percent in April. Also that month, the sector added 21,000 jobs, the first monthly gain since July 2000, according to Labor Department data released last week.
Yesterday's Fed report offered other evidence of a broad manufacturing recovery. Factories operated at 75.7 percent of their capacity in April, up from 75.2 percent in March, suggesting that one of the underlying causes of the 2001 recession, overcapacity of equipment, is being rectified. And the rebound in manufacturing production came in several sectors, with some of the strongest gains in clothing, appliances, furniture and carpeting.