Inflation Boosted by Energy Prices, War Fears

Consumer prices jumped by 0.3 percent in January, the largest increase in nine months, as concerns about a possible war in Iraq helped push energy prices up sharply.

The Labor Department reported Friday that the January increase in its Consumer Price Index, the most closely watched inflation barometer, followed more moderate increases of 0.1 percent in both November and December.

The rise in consumer prices was the largest increase since last April, when prices rose by 0.4 percent.

The big jump last month was driven by a 4 percent surge in energy prices, which have been pushed higher in recent weeks by worries that a possible U.S. war in Iraq would result in a disruption in global energy supplies.

Even with January's 0.3 percent increase, inflation at the consumer level was much more moderate last month than the performance at the wholesale level, where prices shot up by 1.6 percent, the biggest gain in 13 years.

The government's Producer Price Index, which measures price pressures before they reach the consumer, is much more volatile on a month-to-month basis. This is due in part to the fact that it measures only changes in product prices and does not include service charges -- everything from haircuts to legal fees -- which make up a large portion of what Americans spend each month.

Most economists believe that inflation, which has been a no-show for a number of years, will not become a problem in 2003, in part because the economy is still struggling to mount a sustainable recovery from the 2001 recession and firms have little pricing power.

The lack of inflationary pressures has allowed the Federal Reserve to push interest rates to the lowest level in four decades and hold them there for more than a year. It's an effort to bolster consumer and business demand by lowering the cost of borrowing for big-ticket purchases such as homes and autos.

Economists believe the Fed is likely to keep a key interest rate at a 41-year low of 1.25 percent at least until the summer in an effort to guarantee stronger economic growth in the second half of this year.

The 0.3 percent monthly increase in the CPI in January, if it continued for an entire year, would translate into an annual inflation increase of 4 percent. Most economists are forecasting that once war jitters are removed, either by a successful U.S. invasion of Iraq or by a reduction in tensions resulting from Iraq's compliance with U.N. disarmament orders, oil prices and overall inflation will retreat.

Many economists are looking for prices this year to rise by around 2.5 percent, little changed from last year's 2.4 percent gain.

For January, the 4 percent incrase in energy costs was the biggest one-month increase since a similar 4 percent rise last April. Gasoline pump prices were up 6.6 percent, their fastest increase since a 9 percent rise last April. Other big gains were recorded by home heating oil, which was up 8.6 percent, and natural gas, which posted a 4.6 percent increase.

Food prices, another big component in Americans' monthly purchases, actually declined by 0.2 percent in January, the best showing in six years, reflecting big declines in the cost of poultry, vegetables and fruit prices.

Outside of the volatile energy and food sectors, price pressures were well contained, rising by just 0.1 percent, even better than the 0.2 percent increase posted in December.

In this area, prices of new cars, which had shown a sharp increase in the wholesale price index, actually posted a decline of 0.9 percent while airline fares declined by 0.6 percent.