Prices jump more than expected

Inflation adjuster

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NEW YORK (CNNMoney.com) -- Prices paid by consumers rose faster in November, lifted by a spike in the price of gasoline, as the government's key inflation measure came in higher than Wall Street forecasts.

The Consumer Price Index, the key measure of inflation on the retail level, rose 0.8 percent in the month, up from the 0.3 percent rise in October. Economists surveyed by Briefing.com had forecast a 0.6 percent rise in overall prices.

It was the biggest jump in prices since September 2005, when gasoline prices surged higher in the wake of Hurricane Katrina. There was a similar impact of higher gasoline prices this time.

The report showed overall energy prices up 5.7 percent, with gasoline up 9.3 percent. In addition food prices, another recent driver of inflation, were up 0.3 percent.

The so-called core CPI was up 0.3 percent, even though that more closely watched measure strips out the volatile food and energy prices. Economists had forecast a 0.2 percent rise, which was the same increase posted in October. Among the core items seeing prices jump was clothing, where prices jumped 0.8 percent, and medical care, which rose 0.4 percent. It was the largest one-month jump in apparel prices in more than nine years.

Housing also posted a 0.4 percent increase despite widespread reports on home value declines because the report does not measure owner-occupied home prices to estimate this cost. Instead it uses a formula based upon rents.

The core CPI is now up 2.3 percent in the last 12 months, up from a 2.2 percent 12-month gain in the previous report. The Federal Reserve is generally believed to want to see core prices rise 1 to 2 percent a year, so an increase outside of its so-called comfort zone would seem to reduce the chance that the Fed will make further rate cuts soon.

The Fed has cut rates at its last three meetings, citing the risk of an economic slowdown created by problems in the housing and credit markets. But the last cut on Tuesday was a quarter percentage point, when many investors were expecting a half-point cut, and stocks went into a sharp decline after that announcement. U.S. stocks opened sharply lower Friday on the latest inflation reading.

The chance of another quarter-percentage point interest rate cut in January, as predicted by the fed funds futures, fell to 84 percent after the CPI report, from 100 percent before the report.

"No wonder Feddies cite inflation risks," said economist Robert Brusca, citing the statement the central bank released when it trimmed interest rates Tuesday. "Still the economy is weak so we'll see what they do."

Gus Faucher, director of macroeconomics for Moody's Economy.com, said he believes the price jump in Friday's report is not something the Fed needs to worry about, given the the impact volatile oil prices had.

"I don't expect to see much pass through to core CPI," he said. "With economy remaining soft, I don't think we have to worry about businesses raising prices much."

But Rich Yamarone, director of economic research at Argus Research, said there is much more growth and underlying core inflation than has been assumed by many economists. He said many companies in consumer products, food and air travel have been announcing price increases due to a combination of higher costs and continuing high demand for their product.

"All those price hike announcements we saw in the last three, six or nine months are now coming home to roost," he said. "These reports are not coming in on softer side, they're all coming out much stronger than expectations. Consumers are continuing to spend money. It should diminish the chance of a recession, not increase it."