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Consumer prices take a hefty leap

With inflation picking up, analysts expect a bigger move next time the Fed raises interest rates.

WASHINGTON - Consumer prices in February registered their biggest increase in four months, forcing people to shell out more to cover energy, medical and education bills.

The latest snapshot of inflation, released by the Labor Department on Wednesday, raised the chances that the Federal Reserve might have to be more aggressive in its interest rate-raising campaign, economists said.

The government's most closely watched inflation barometer, the consumer price index, jumped 0.4 percent in February. That was a fresh signal inflation is gaining momentum now that the economic expansion is firmly entrenched.

The pickup in inflation came after consumer prices were flat in December and increased by just 0.1 percent in January. The February increase confirmed the more hawkish tone about inflation that Fed policy-makers took on Tuesday.

"Pressures on inflation have picked up in recent months," Fed policymakers said. They also noted that pricing power - the ability of companies to raise prices to customers - is "more evident."

That assessment accompanied their decision to boost a key short-term interest rate by one-quarter of percentage point, to 2.75 percent. It was the seventh such increase since the Fed began bumping up rates in June in an effort to prevent inflation from hurting the economy.

"It's clear that Fed members saw this coming their way," Oscar Gonzalez, economist at John Hancock Financial Services, said about inflation accelerating. "Inflation is rising, but the sky isn't falling."

Sharp increases in energy costs, including gasoline, led the way in February. But many other prices, including those for air travel, medical care, education and lodging climbed.

Excluding energy and food prices, core prices rose 0.3 percent in February. That compared with a 0.2 percent increase in January and was the largest increase since September.

For the 12 months ending February, core prices rose 2.4 percent, the fastest pace since August 2002.

The CPI report, along with the Fed's new concerns about inflation, led some economists to say they believe the Fed's credit tightening probably will last well into 2006. They also spoke of the possibility the Fed might order a bolder, one-half of a percentage point increase this year if inflation were to worsen, analysts said.

"Inflation is percolating higher and the Fed will aggressively respond to that," said Mark Zandi, chief economist at Economy.com. He predicted the Fed's key interest rate will climb to around 5 percent by late next year.

With the economy expanding, some companies are finding it easier to boost prices, analysts said. A weaker U.S. dollar also is putting pressure on prices of imported goods, which gives American companies more room to raise prices.

Rising inflation can strain the family budget. After adjusting for inflation, weekly earnings of nonsupervisory workers dropped 0.4 percent in February, compared with a 0.2 percent increase in January.

In February, energy prices jumped 2 percent last month, compared with a 1.1 percent decline registered in January. Gasoline prices in February rose 3.2 percent, natural gas prices were up 2.5 percent and fuel oil costs increased 2.4 percent.

Oil prices, which set a new record high last week, are hovering around $54 a barrel.

Economists will watch to see whether high prices restrain consumer spending, the lifeblood of the economy. "Folks who live paycheck to paycheck have seen the biggest bite out of their pockets," said Chris Burdick, director of economic analysis at Schwab Center for Investment Research.

[Last modified March 24, 2005, 01:19:16]