NEW YORK (CNN/Money) -
Prices paid by consumers rose faster in March, the government reported Wednesday, coming in above Wall Street expectations and raising new concerns about inflation and rising interest rates.
The Consumer Price Index, the government's main measure of inflation, increased 0.6 percent in March, compared to a 0.4 percent rise in February. Economists surveyed by Briefing.com had forecast a 0.5 percent increase.
Of greater concern to the markets, the so-called "core CPI," which strips out often-volatile food and energy prices, rose 0.4 percent, compared with February's 0.3 gain. It was the largest month-to-month percentage change in that closely watched reading since August 2002.
Briefing.com's consensus forecast core CPI was for only a 0.2 percent rise.
The report showed that overall prices are up 3.1 percent during the last 12 months. That was faster than a separate Labor Department report showed wages rising over the period -- both average hourly and average weekly wages were up only 2.6 percent during the same period. That means wages aren't keeping pace with inflation.
A 12.4 percent rise in energy prices is responsible for much of the increase in overall prices. The core CPI is up 2.3 percent during the last 12 months.
But both the overall CPI and core CPI had faster annual rates of increase during the first quarter -- a 4.3 percent annual rate for CPI and a 3.3 percent annual rate for core CPI during those three months. That means the pace of inflation is picking up.
Treasury prices fell sharply, causing yields on the 10-year note to soar as high as 4.29 percent before retreating slightly to 4.27 percent. Rates had been 4.22 percent before the report. Traders saw a far greater chance of the Federal Reserve getting more aggressive in its rate hikes in order to slow the economy and battle inflation.
At the end of last week some weak earnings reports had raised concerns over a slowing economy and started discussion among some economists about whether the Fed might take a break as soon as its June meeting from its course of quarter-point rate hikes. The chance of that pause in rate hikes seemed to disappear with Wednesday's report.
But Anthony Chan, senior economist with JPMorgan Asset Management, said he thinks it's too soon to again talk about the Fed turning to a half-point rate hike as it battles inflation.
"What this report does is lower the leverage of policy doves within the central bank in favor of slowing the pace of rate hikes anytime soon," he said. "While it strengthens the hand of policy hawks, I am not sure if gives them a smoking gun to justify an immediate move towards a more aggressive policy stance at this time."
Chan and economist Robert Brusca of FAO Economics both said that the inflationary pressures in the report are not as great as suggested by the overall CPI and core CPI numbers. Brusca said that the price increases are less wide spread than some previous reports, with some segments, such as non-energy commodity prices, showing decreases.
Both Chan and Brusca said the rise in both CPI and core CPI was fed by a large increase in housing and lodging prices that are unlikely to be sustained. And Greg Valliere of Sanford Washington Research Group said that even with the rise in 10-year yields, they are still low by historic standards.
"That's a commentary that the markets think the bigger concern is the soft patch, not inflation," said Valliere. "Nobody knows how big a soft patch this is. The key to understanding a lot of this is obviously the price of oil."
Valliere said that if anything the report raises the risk of stagflation, the combination of rising prices and soft or stagnant economic growth.
"That's the worst of all worlds," he said.
He pointed to comments Tuesday from San Francisco Federal Reserve President Judy Yellen that the risk of stagflation is something that needs to be monitored. But Valliere agreed with Yellen's view that there is not a significant threat of stagflation at this time, even with the core CPI surprising economists and investors.
"I think it's a mistake to overreact to one number," he said.
Valliere said that even with the unexpectedly large core CPI number in this report, it's too soon to say that the Fed won't leave rates unchanged at its two-day meeting June 29 and 30. There are two more monthly employment reports and two more CPI reports to come before then that could change the Fed thinking.
"The oldest cliche in the book is that the Fed is data driven," he said.
While the tech-heavy Nasdaq was up in early trading on strong earnings reports from Intel and Yahoo!, other major U.S. stock indexes were down in early trading Wednesday following the CPI report. Futures had pointed to a higher open for stocks before the 8:30 a.m. ET reading.
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