Inflation Seen Jumping 2.5 Percent

Fed by escalating energy prices and a rebounding economy, inflation will pick up more this year than previously thought, a group of economic forecasters says.

In its latest economic outlook, the National Association for Business Economics (search) estimated that inflation, as measured by the Consumer Price Index (search), will rise by 2.5 percent in 2004. The index is the government's most closely watched inflation barometer.

If the new projection being released Monday should prove accurate, it would mark a sharp jump from the index's 1.9 percent increase in 2003 and would represent its largest increase since a 3.4 percent advance in 2000.

The association's new inflation estimate for 2004 is higher than its previous estimate, made in February, of a 1.8 percent rise.

"Rising prices of energy and other industrial commodities are contributing to the higher inflation, but so too is robust growth," said the group's president, Duncan Meldrum, chief economist at Air Products and Chemicals Inc.

Recent economic reports suggest inflation is stirring from its slumber. Other data show businesses are beginning to step up hiring, and industrial activity is brisk. All these lead more economists to predict that the Federal Reserve (search) may raise short-term interest rates next month.

Other analysts still believe the Fed's first rate increase in more than four years will come in August or later. The bank's crucial short-term rate is now at a 46-year low, 1 percent.

Inflation is creeping up for a number of reasons, economists say.

Some companies, which have had to keep a lid on price increases during the economic slump, are finding it easier to raise prices in a rebounding economy.

Rising energy costs are pushing up prices for goods and services, including air travel and food.

Higher prices for some commodities, such as steel, also are a factor in some cost increases, analysts say.

Inflation's upward movement signifies a big change in the pricing climate from a year ago. Then, the Fed worried about the possibility of deflation, a prolonged and widespread price decline. Still, a 2.5 percent increase in inflation would be considered historically rather low, no threat to the economy.

The economics association's forecasters also believe that for all of 2004 economic growth will be higher and the unemployment rate lower than previous estimates.

They believe the economy will expand by 4.7 percent this year, up slightly from a previous estimate of a 4.6 percent rise and exceeding the 3.1 percent advance in 2003. The new estimate, if borne out, would mark the best economic growth since 1984.

The unemployment rate, meanwhile, is expected to fall to 5.5 percent this year. That's better than the previous forecast of a 5.6 percent rate and an improvement from the 6 percent jobless rate in 2003.

The association's new estimates were prepared by a group of 31 professional forecasters drawn from the association of more than 2,500 members.

"One should conclude from the latest survey that the expansion is now on a solid and sustainable path," Meldrum said. "If there is a dark lining in this silver cloud, however, it is the upward revision to the panel's forecast of inflation."

With the economy back in the groove, forecasters also lowered their estimate for the federal budget deficit this year to $464.4 billion, from $492.5 billion. The new estimate would still be a record in dollar terms.