Inflation flared last month as rising prices for medical care, food and other items more than offset falling fuel prices, raising concern in financial markets that a slowing economy has not yet tamed price pressures.
Stock and bond prices fell after the Labor Department released its latest inflation figures, which convinced many investors that the Federal Reserve is not likely to cut interest rates any time soon and that it might have to raise them to subdue prices.
The department's consumer price index, a widely followed inflation gauge, rose 0.2 percent last month, as a 1.5 percent drop in fuel prices helped offset higher prices for many other goods and services.
The index was 2.1 percent higher than in January of last year -- a milder increase than the 2.5 percent rise for all of 2006. That's consistent with other recent data suggesting that overall, the economy has cooled.
But investors saw ominous trends in the details. Prices for gasoline and fuel oil tumbled last month because of falling crude oil prices, as natural gas prices fell because of unseasonably warm weather. Both trends have reversed in February, suggesting inflation will be higher this month.
And because oil prices swing so much, economists seek signs of underlying inflation by studying so-called core measures, which exclude volatile food and fuel prices. The department's core consumer price index jumped 0.3 percent in January -- the largest monthly increase since June. That left core prices 2.7 percent higher than a year earlier.
The higher core inflation resulted primarily from a rapid 0.8 percent increase in medical costs, including prices for prescription drugs, hospital care and visits to physicians' offices.
Food prices rose 0.7 percent in January, the biggest increase since April 2005. Airfare and hotel room rates climbed. Prices also increased for electricity, water, and sewer and trash collection, the department said.
"Inflation is not yet under control," Bernard Baumohl, managing director of the Economic Outlook Group, told clients. "Clearly this is not what the Fed wants to see."
Fed Chairman Ben S. Bernanke told Congress last week that the central bank is likely to hold interest rates steady for a while to see whether slowing economic growth nudges inflation lower.
Inflation pressures have eased in recent months, but the monthly figures can jump around, so it will be "some time before we can be confident" that price pressures will continue to ease as the Fed forecast, Bernanke said.
He stressed that inflation remains too high, and Fed policymakers worry that it may climb higher. They are prepared to increase interest rates if necessary to force inflation lower, he said.
Bernanke and his colleagues are unlikely to raise interest rates because of one monthly inflation report but will if they see a series of similar reports in coming months, analysts said.
Fed policymakers forecast inflation to fall this year and next because of slower economic growth, cooled in large part by the slumping housing market. Recent data -- including flat retail sales, lower industrial production and plunging home construction in January -- show the economy is probably growing at a modest pace, around 2 percent a year, analysts said.
The Conference Board, a private business group, said yesterday that its index of leading economic indicators -- data such as building permits, consumer expectations and stock prices that hint at where the economy is heading -- rose slightly last month, by 0.1 percent. Analysts saw that as a sign that economic growth will keep to a modest pace in the months ahead.
Some of the price increases last month reflected temporary factors, such as crop freezes in California that boosted prices for some fruits and vegetables.
But analysts worried that some of the trends in the inflation report are likely to continue. Medical costs, for example, were 4.3 percent higher in January than a year earlier, and inflationary pressures in that sector are expected to continue as the aging U.S. population consumes more health care.
The increase in many food prices reflects federal efforts to encourage the production of ethanol as an alternative fuel, said Richard Yamarone, director of economic research at Argus Research. Higher demand for ethanol has boosted prices for corn, an ingredient in the fuel's production, as well as for other grains as farmers have shifted resources to produce more corn, he said. Corn is the main source of high-fructose corn syrup, a widely used ingredient in sweetened beverages and processed foods.
Yamarone said overall inflation is contained. But he forecast fuel prices to stay close to where they are now as food prices rise this year.
"You'll see people complaining less about their gasoline bills and more about their grocery bills," he said.
If inflation continues at this pace, workers may also complain about lagging pay. Average weekly earning for most workers fell 0.3 percent in January from the month before after adjusting for inflation, the Labor Department said in a separate report. These wages, paid to factory and non-managerial workers, were 2.1 percent higher last month than in January 2006, after adjusting for price changes.