Consumer prices spark inflation fears
Government's main inflation gauge rose more than expected in April and 'core' rate did too; more Fed rate hikes coming?
By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Consumer prices jumped in April, sparking a fresh round of inflation worries on Wall Street, and economists say the report gives investors and the Federal Reserve good reason to worry.

The Consumer Price Index rose a surprising 0.6 percent in April, the Labor Department reported, compared with the 0.4 percent rise in March. Economists surveyed by Briefing.com had forecast a 0.5 percent rise in the government's key measure of inflation.

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Higher energy prices, led by an 8.8 percent jump in the price of gasoline, helped account for the higher inflation reading. Gas prices were up even further excluding seasonal adjustments that government number crunchers make ahead of the summer driving season, soaring 14.5 percent.

The so-called core-CPI, which excludes often-volatile food and energy prices, rose 0.3 percent, the second straight month that the closely watched reading came in at that level. Economists had forecast there would be only a 0.2 percent in core CPI in April.

"This is one of those bell ringers, and a real disappointment," said Stuart Hoffman, chief economist for PNC Financial Services Group.

On Wall Street, stocks tumbled and bond prices fell after the report on concerns that the Federal Reserve will be forced to raise interest rates again in June and perhaps beyond in its bid to contain inflation.

The central bank said in its statement when it raised short-term rates last week that it might need to keep going but that it would depend on economic readings.

The Fed pays more attention to the core CPI reading, and it said earlier this month that higher energy prices "have had only a modest effect on core inflation." But the core inflation now is up 2.3 percent over the last 12 months, more than the 2 percent level that's seen as the comfort level for central bankers at the Fed.

There's a good chance that energy price increases are still having only a marginal impact on core CPI. Some of the areas showing higher prices are those seen as less energy-dependant -- such as housing rents, medical costs and services.

But economists said that the numbers suggested there is more underlying inflationary pressures now showing themselves in the economy than has been seen for quite some time.

"I think people are going to have to become a little more accustomed to the rising rate of inflation," said Mark Vitner, senior economist for Wachovia. "That's not going to be a one-time blip."

Still, while Wachovia is now projecting another rate hike by the Fed in June, some other economists think that the Fed is still likely to sit tight, at least at that meeting. But even those expecting a pause say this report raises the chance of only a short pause.

"I still think there will be a pause, but I'm willing to change my mind based on those reports," said Anthony Chan, chief economist with JPMorgan Private Client Services. "I'd place the probability of a hike [in June] at no more than 20 or 25 percent right now. But if you had asked me yesterday, I would have put it somewhere between 10 to 15 percent."

Chan said that even if the Fed doesn't hike rates in June, these recent inflationary pressures raise the chance of it again hiking rates at subsequent meetings, rather than leaving the Fed funds rate at 5.0 percent longer term.

"For a long, long time we've been told the Fed doesn't want to see core above 2.0 percent on year-over-year basis," he said. "What these numbers are telling us is that a pause may not be a long-term pause."

Bill Cheney, chief economist at John Hancock Financial Services, also said he still expects a pause from the Fed at the June meeting, though he sees a greater chance of rates going up more by the fall or end of the year. He said even more than year-over-year rise in the core is the 3.2 percent annual rate of increase in the core CPI over the last three months.

"A 2.3 percent [year over year] rise seems very benign, but it's been coming up quite significantly recently," said Cheney. "A quarterly rise above 3 percent can't be tolerated by the Fed for long. And I think wage increases might be the much bigger worry than energy. The labor market is indeed getting a bit tight. As you see prices in service sectors go up, there is reason for concern."

Overall, consumer prices are up 3.5 percent over the last 12 months. That's less than the 3.8 percent rise in average hourly wages over the same period, according to a separate Labor Department report, meaning that wages are narrowly outpacing prices.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.