Apr 2004 Financial News

U.S. consumer prices jump, trade gap narrows

Apr 14, 2004

By Tim Ahmann

WASHINGTON, April 14 (Reuters) - U.S. consumer prices shot up last month as a broad array of costs rose, according to government data on Wednesday, suggesting long-dormant inflation may be stirring and raising expectations the Federal Reserve would soon raise interest rates.

A separate report showed the U.S. trade gap narrowed in February as a weak dollar and stronger economic growth overseas propelled exports to record levels.

The Labor Department said its consumer price index, the most widely used gauge of U.S. inflation, rose 0.5 percent in March, outstripping Wall Street's forecast of a 0.3 percent gain and marking an acceleration from February's 0.3 percent rise.

In addition, the closely watched core CPI, which strips out often-volatile food and energy costs, surged 0.4 percent for the biggest increase since November 2001. Economists had expected core CPI to advance just 0.2 percent.

"It looks as though core inflation is back," Moody's Investors Service Chief Economist John Lonski said.

The report bolstered a growing conviction in financial markets that a long period of historically low interest rates could draw to a close sooner than thought just weeks ago.

Treasury bond yields spiked to their highest levels this year and the dollar rose. Stock prices managed small gains.

"We have the core CPI now growing at an average monthly rate of roughly 0.3 percent thus far in 2004. That adds up to a rate hike happening sooner rather than later," Lonski said.

The Federal Reserve has held overnight rates at a 1958 low of 1 percent since June last year and has vowed to exercise patience in determining when to raise them.

But economists said the inflation report increased the odds the Fed's policy-setting Federal Open Market Committee could boost borrowing costs as early as this summer.

"So much for the FOMC's view that inflation is benign and will stay that way for an extended period," said Joel Naroff, president of Naroff Economic Advisers.

Over the past 12 months, core prices have risen 1.6 percent, a sharp pick-up from the tame 1.2 percent increase posted through February. The gain suggested the 38-year low of 1.1 percent reached in November was a thing of the past.

TRADE SIGNALS STRENGTH

The Commerce Department, meanwhile, said the U.S. trade deficit narrowed by more than 3 percent in February to $42.1 billion, slightly below analysts' expectations.

U.S. exports leapt 4 percent -- the biggest monthly increase since October 1996 -- to a record $92.4 billion. Imports rose 1.6 percent to a record $134.5 billion, a sign of healthy domestic demand.

Analysts said the smaller-than-expected trade deficit meant forecasts for first-quarter U.S. economic growth would need to be bumped up toward a hefty 5 percent annual rate.

The lower dollar appeared to give a boost to a wide array of exports. Shipments of industrial supplies and materials and autos and auto parts both set records. Exports of consumer goods were only slightly below the record set in November and exports of capital goods, such as aircraft and industrial machines, were the highest since May 2001.

Exports of services, including travel, also set a record.

FALLING BEHIND

While the economy is now flexing it muscles, worker wages have stagnated -- and a report on Wednesday showed the quickened pace of inflation eating in to any gains.

The Labor Department said real average weekly earnings fell 0.7 percent in March and were essentially unchanged over the past 12 months.

Part of the inflation-adjusted wage weakness reflects big increases in energy prices in recent months. In March, energy prices rose a steep 1.9 percent.

But energy was not the only culprit.

Clothing prices climbed 0.9 percent in March after four consecutive monthly drops, while lodging costs climbed 3.8 percent after a big fall in February. The department said the turnaround in those prices accounted for the acceleration in core inflation.

In addition, medical care costs and tuition each rose a steep 0.6 percent.

Separately, the Mortgage Bankers Association said new U.S. mortgage applications fell last week for the fourth straight week as demand for loan refinancings dropped sharply.

Source: Reuters
http://www.reuters.com/financeNewsArticle.jhtml?type=economicNews&storyID=4827334