Inflation Accelerated Last Month

By KELLY EVANSDecember 14, 2007 5:20 p.m.
An unexpectedly large jump in consumer prices last month suggested inflationary pressures haven't receded and the Federal Reserve may have less latitude than markets believe to lower interest rates to cushion the economy.
Ken Goldstein of the Conference Board discusses factors that will continue driving consumer prices. Kelsey Hubbard reports.
The Labor Department reported that its November consumer price index rose by a seasonally adjusted 0.8% from October, the largest monthly gain in two years and a 4.3% yearly increase.
Energy prices, which jumped 5.7% over the month, accounted for more than two-thirds of the gain. But core consumer prices, which exclude energy and food, rose 0.3% from October and 2.3% over the year.
Economists had expected core prices to rise just 0.2%. Fed policy makers follow the lesser-known personal consumption expenditures price index, and economists believe that when that index is reported next week it will still show inflation at or above the top of the 1.5%-to- 2% range policy makers consider price stability.
That said, the latest data gives credence to the Fed's stated concerns that inflation pressures remain, and that persistently high overall inflation could yet boost public expectations of future inflation, which can become self-fulfilling.
That realization caused both stock and bond markets to fall on Friday; as the prospect of interest-rate relief receded a bit. Markets still expect the Fed to cut short-term rates again at the end of January, but they trimmed the odds.
Kenneth Beauchemin, U.S. economist with research firm Global Insight, noted the sharp rise in consumer prices "may well be the first clear sign that months of soaring and volatile energy prices are seeping their way into consumer prices at large."
Stephen G. Cecchetti, a global finance professor at Brandeis International Business School, called the consumer price index numbers "scary" because price pressures were widespread in the report. Apparel prices jumped 0.8% in November while shelter and medical care costs also rose faster than expected.
The rise in consumer prices comes on the heels of a similar sharp increase in producer prices last month and signs of inflationary pressures elsewhere in the economy. Producer, or "wholesale," prices jumped 3.2% in November -- the biggest monthly gain since 1973 -- and 7.6% from a year earlier. Rising prices for food, tires, and other household goods -- unless matched by higher wages -- threaten to crimp consumer spending, the behemoth of economic growth.
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Despite rising oil prices and other signs pointing to accelerating inflation in recent months, many economists have been more focused on whether economic growth is about to stall. But a surprisingly strong report on November retail sales, released Thursday, and the Fed's latest report on industrial production, released Friday, has prompted some analysts to rethink whether the economy is headed toward recession.
The Fed report showed that output at U.S. factories, mines, and utilities rose 0.3% in November after dropping a revised 0.7% in October.
J.P. Morgan economist Abiel Reinhart noted that "in the near-term, industrial production will probably remain soft as inventory growth decelerates, auto production declines, and housing-related products remain a drag on manufacturing."
Manufacturing output rose 0.4% in November after falling 0.6% in October. Manufacturing capacity utilization ticked up 0.2% to 79.9% but remains below the recent trend, suggesting output may be weak in coming months.
Ethan Harris, chief U.S. economist at Lehman Brothers, said he expects that the current slowdown in the economy will take some pressure off prices. "Slower growth means weaker commodity prices and a weaker labor market [so] a lot of the inflation worries we have now will dissipate in the new year."
But he added that an unexpectedly resilient economy could fuel inflation.
"You've got a big wild card thrown into the economic outlook -- this energy and food price shock that's both hurting growth and raising inflation risks," Mr. Harris said. "This creates a lot of difficulty for policy making. Somebody 'up there' doesn't like [Fed Chairman] Ben Bernanke."
Write to Kelly Evans at kelly.evans@wsj.com
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