NEW YORK (CNNfn) - U.S. consumer prices rose a modest 0.2 percent during January, in line with analysts' expectations, suggesting inflation continues to remain under wraps despite the economy's continued growth.|
However, economists said the report is not likely to dissuade the Federal Reserve from raising short-term interest rates again, likely in the near future.
The small increase in the Labor Department's Consumer Price Index, widely considered the government's best measuring stick of inflation, came as fruit and vegetable prices remained steady while housing and transportation costs increased only modestly. The growth matched both economists' expectations and the index's rate of growth during December.
Stripping out volatile food and energy costs, the "core" CPI rose 0.2 percent, in line with economists' estimates, but slightly higher than the 0.1 percent increase recorded during December.
In a separate report, the Commerce Department said the nation's trade deficit narrowed to $25.5 billion during December from a revised $27.1 billion in November, surprising economists who were expecting the deficit to expand to $27.6 billion.
Fed watch continues
The CPI number was being watched closely by inflation-wary investors, already jittery from Federal Reserve Chairman Alan Greenspan's testimony before Congress Thursday when he hinted the central bank may raise short-term rates again to help cool the economy.
The Fed has hiked interest rates four times since last July in an effort to ward off inflationary pressures. But Greenspan cautioned Thursday that while those increases have successfully staved off inflation thus far, they likely were not enough to prevent future pressures unless the economy's growth rate slows somewhat.
Greenspan's cautionary message was muted somewhat by January's producer price index report, also released Thursday, which showed prices at the wholesale level still indicated no real signs of inflation.
But economists suggested the CPI number, while tame, offered little relief from a possible rate increase -- particularly given Greenspan has played down its significance in recent months.
The Fed is "looking for quite a nice slowdown in the economy and you are not seeing that happen in the first quarter," said Robert Brusca, chief economist with Ecobest Consulting. "We're playing with fire, and the Fed's a little bit uncomfortable with that." (307 KB WAV) (307 KB AIFF).
"The economy is still growing very rapidly, probably faster than is sustainable, at this stage of the expansion. The fact is nobody knows for sure what it will take to stop it," agreed Richard Rippe, chief economist with Prudential Securities, who said that the short-term inflation picture remains very good.
Still, investors took little solace in the lack of inflation apparent in the back-to-back PPI and CPI reports. By mid-morning Friday, the Dow Jones industrial average tumbled more than 100 points while the Nasdaq was off 30 points.
Food, apparel offset rising fuel costs
Food and beverage prices remained stable during January, reflecting decreases in the prices for fruits, vegetables and dairy products. Housing prices, however, jumped 0.3 percent due to higher shelter, fuel and utility prices.
That increase was offset by a 1.1 percent drop in apparel costs during January, that sector's largest decline in more than a decade, as consumers feasted on post-holiday sales.
Transportation costs slowed significantly during January, posting a 0.1 percent increase after climbing 0.8 percent during December. A decline in new vehicle costs helped offset a 1.6 percent increase in gasoline costs in that sector.
Overall, the CPI's energy index rose 1.0 percent during the month, with petroleum-based energy increasing 1.9 percent.
"Recent trends show the price pressures are well contained, with the exception of oil," said Mark Vitner, an economist with First Union Corp. "The core CPI rose at just a 1.8 percent annual rate over the past three months, which is slightly below the 1.9 percent year-to-year gain. That means the core CPI is unlikely to accelerate in the next few months and allows the Fed to continue its policy of just gradually pushing up interest rates."
Despite the decline in December, the U.S. trade deficit swelled to a record $271 billion last year as the booming U.S. economy drew in a flood of imports.
Deficits with Canada, China, Japan, Western Europe and Mexico all rose to new highs, driven by strong U.S. consumer demand. The surge in imports overshadowed record exports of $958.49 billion in 1999. December exports totaled a record $85.17 billion.