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CPI posts biggest rise in four months
Following Fed inflation warning, reading sparks worries about bigger rate hikes to come.
March 24, 2005: 8:47 AM EST
By Chris Isidore, CNN/Money senior writer
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NEW YORK (CNN/Money) - Boosted by the soaring price of oil, retail prices rose faster in February than they have in four months, the government reported Wednesday, a day after the Federal Reserve voiced new concern about inflation.

The reading on the Consumer Price index, the government's main inflation gauge, came in higher than most economists had forecast. The Labor Department said CPI rose 0.4 percent in February after a 0.1 percent increase in January. It was the biggest increase since October.

The "core" CPI, which excludes often volatile food and energy prices, rose 0.3 percent after a 0.2 percent January increase, the department said. Economists surveyed by had forecast CPI would be up 0.3 percent in February and core CPI would gain 0.2 percent.

On Wall Street, bond prices initially fell along with stocks on concerns that a pickup in inflation would force the Fed to start raising short-term rates more aggressively in a bid to maintain price stability. But both stock and bond prices stabilized later in the morning as oil futures tumbled for a second straight session.

The Fed, the nation's central bank, raised rates another quarter percentage point Tuesday -- the seventh straight increase since it started its tightening campaign last June.

While the Fed also said it expected future hikes would be at a "measured" pace, it warned that "pressures on inflation have picked up in recent months," adding, however, that "longer-term inflation expectations remain well contained" and that the rise in oil prices has "not notably fed through to core consumer prices."

But the gain in the core CPI reported Wednesday is the biggest since September, while the increase in the overall CPI is the highest since October.

The overall reading means retail prices have risen 3 percent over the last 12 months, with core prices up 2.4 percent over that period. That's the largest 12-month change in the core CPI since August 2002.

Energy prices jumped 2 percent in the month, the department said, while food prices posted a modest 0.1 percent increase. Gasoline rose 5 percent from January and a whopping 14.7 percent from a year earlier.

Clothing prices fell as the end of import quotas on cotton clothes in January apparently helped push prices lower. Health care costs and transportation posted increases, the latter due partly to the rise in the price of fuel.

More aggressive stance?

The CPI report raises the risk that inflation is taking hold and will surely spark more aggressive action by the Fed, some economists said.

"Inflation is rising in more sectors than it is falling. It is doing so across horizons of one month, six months and 12 months," said Robert Brusca of FAO Economics. "We are left in all this wondering what the Fed is up to and what it is waiting for."

But Anthony Chan, senior economist with JPMorgan Fleming Asset Management, said increases in items such as airline tickets, cars and housing are unlikely to be repeated.

"Price pressures are starting to build. The question is if these are sustainable. I think the jury is still out," he said.

Chan said the Fed will see the March inflation numbers before its next meeting May 3, which could take the pressure off the Fed to get more aggressive.

But he acknowledged that the inflation readings are getting near the tipping point at which the central bankers would feel compelled to raise rates by a half point rather than a quarter point.

"I think if we get another 0.3 rise in the core CPI, I think the Fed will want to draw line in the sand," said Chan. "The Fed statement shows there are a lot of anxious parties at that meeting willing to be (more) aggressive."

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