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Thursday, May 18, 2006 - Page updated at 10:52 AM

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Inflation wind blows stronger, moves beyond gas pumps

The Associated Press

WASHINGTON — Sticker shock may be spreading. It's not only motorists filling up at the pumps who are getting clobbered. Clothes shoppers, students, airline travelers, the sick in hospitals and others are seeing prices march higher.

All told, consumer prices vaulted by 0.6 percent in April, fueling concerns the Federal Reserve might keep pushing interest rates up to fend off inflation. Discouraged Wall Street investors sent stocks tumbling.

Soaring prices for gasoline and other energy products have played a major role in the spikes over the past two months. But the price tags of many other goods and services also are climbing.

The increase in the closely watched Consumer Price Index (CPI) was the biggest jump in three months, the Labor Department said Wednesday. That followed an already strong 0.4 percent advance in March.

"The whiff of inflation is feeling more like a gust," observed Richard Yamarone, economist at Argus Research. "The inflation picture is worsening."

On Wall Street, stocks plunged. The Dow sank 214.28 to 11,205.61 Wednesday, its biggest point-loss in three years, since it fell 307 points on March 24, 2003. The tumble Wednesday was a fraction bigger than a 213.32 dive it took earlier this year. That Jan. 20 decline was bigger in percentage terms, though — down 1.96 percent. The Dow has shed 437 points in the past five trading days.

Boeing, one of the 30 Dow stocks, plummeted $2.63 to close at $83.77. Microsoft, also a Dow stock, fell 28 cents to $22.73, a 52-week low.

Broader stock indicators also dropped sharply. The Standard & Poor's 500 index lost 21.76 to 1,270.32, its lowest finish since 1,262.86 on Feb. 13. The Nasdaq fell 33.33 to 2,195.80, showing a loss for the first time in 2006.

"The CPI data really kicked the market in the teeth [Wednesday]," said Ken Tower, chief market strategist for Schwab's CyberTrader. However, he said stocks are now oversold after several days of steep losses, suggesting investors may start looking for positive signs to spur buying.

Excluding energy and food prices, "core" prices went up 0.3 percent in April for the second month in a row. The sizable back-to-back increases suggested that rising energy costs may be starting to breed wider inflation throughout the economy.

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Stuart Hoffman, chief economist at PNC Financial Services Group, described the inflation performance as "rotten to the core." He and other economists said it indicates more companies are passing along some of their higher costs for energy and other materials to consumers.

"The problem for the Fed is that we are seeing higher costs in a growing number of places," said Joel Naroff of Naroff Economic Advisors.

Economists were forecasting a 0.5 percent increase in overall consumer prices and a 0.2 percent rise in core prices.

So far this year, consumer prices are rising at an annual rate of 5.1 percent, much faster than the 3.4 percent increase registered for all of 2005. Core prices are advancing at a brisk 3 percent pace, compared with 2.2 percent rise for last year.

A growing number of economists said Wednesday's inflation report raises the odds for another rate increase at the Fed's next meeting, June 28-29. "I conclude that higher interest rates are in our future," said Brandeis University economics professor Stephen Cecchetti.

Some, however, still believe the Fed will leave rates alone at the June meeting on the grounds that slower economic growth will eventually ease inflation pressures.

The economy in the first quarter grew at a brisk 4.8 percent pace, the fastest in 2 years. Growth is expected to slow to around a 3 percent pace in the April-to-June period, still healthy.

One thing the Fed will be keeping close tabs on is how energy prices affect inflation and economic activity.

Energy prices can make inflation worse. They also can crimp overall economic activity by forcing consumers to pare their spending and investment.

Or, high energy prices can result in both scenarios — which would be a tricky problem for the Fed to deal with. To counter inflation, the Fed would be inclined to boost interest rates. To treat economic weakness, the Fed would want to leave rates alone or, in more serious cases, lower them.

Oil prices hit a record high of $75.17 a barrel in late April. They closed Wednesday at $68.69.

Wednesday's report said energy prices shot up 3.9 percent in April, the most since January. Gasoline prices jumped 8.8 percent. Fuel oil prices went up 5.2 percent.

Other prices also bounded ahead last month.

Airline fares rose 1.6 percent, the most in nine months. Hospital and other related services climbed 0.8 percent, the most in two months.

Clothing prices rose 0.6 percent. Education costs, including tuition and books, rose 0.5 percent. Prices for shelter, including rent, went up 0.3 percent.

There were a few bright spots. Food prices were flat in April. Computer prices dropped 2.6 percent.

Against the backdrop of mostly rising prices, workers are seeing only small gains in their paychecks.

A separate Labor Department report showed average weekly earnings, after adjusting for inflation, edged up 0.2 percent in April. That was an improvement from a 0.1 percent dip in March.

"Workers are making some headway — but it is not very much," said Ken Mayland of ClearView Economics.

Copyright © 2006 The Seattle Times Company

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