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Inflation Grew in Jan., Led by Food, Health Costs

BY Admin  February 20, 2008 at 5:40 PM EST

Consumer Price Index rose 0.4 percent in January

The Labor Department said the Consumer Price Index posted a gain of 0.4 percent last month, matching the December increase.

Core inflation, which excludes food and energy, showed an increase of 0.3 percent, the biggest jump in seven months. The cost of clothing, education, lodging and tobacco also increased.

The inflation report “should not provide too much of a headache for the Federal Reserve, which seems to be largely indifferent to near-term inflation movements at the moment,” wrote economists at ING Bank, according to the New York Times.

Also Wednesday, a global financial services firm said the U.S. economy is in a mild recession as a weakening consumer sector has compounded the ongoing problems in the housing and credit markets.

“It’s not coming, it’s here,” UBS economists said in a research report, according to Reuters.

The company’s economists predict the U.S. gross domestic product will fall 0.6 of a percentage point from the end of 2007 to the middle of 2008.

In other economic news, the Commerce Department said that construction of homes and apartments rose by 0.8 percent to a seasonally adjusted annual rate of 1.012 million units in January. That was the first increase since October and followed a plunge of 14.8 percent in December.

However, applications for building permits, considered an indicator of construction trends, fell by 3 percent to an annual rate of 1.048 million units, the lowest level since November 1991. That was viewed as evidence that the nation’s troubled housing sector has yet to hit bottom.

Ian Shepherdson, chief economist at High Frequency Economics, a private consulting firm, told the Associated Press that the worse-than-expected news on inflation could prompt the Federal Reserve to cut interest rates by only a quarter-point at its next meeting on March 18 rather than the half-point move that markets have been expecting.

The Fed has been aggressively cutting the benchmark federal funds rate, bringing it down to 3 percent from 5.25 percent in mid-September to bolster the economy against a housing downturn and a pinch in credit availability.

Some economists believe growth in this quarter and the next will turn negative, fulfilling the classic definition of a recession. To combat the economic weakness, Congress passed a $168 billion economic stimulus package to provide tax rebates to more than 130 million American families.

January’s 0.4 percent rise in consumer prices was led by increases in the prices of food, energy and health care.

Food prices jumped by 0.7 percent, the biggest increase in 11 months and up sharply from a 0.1 percent rise in December. Prices for vegetables, fruits, poultry and pork all showed big increases. The rise in food costs has been blamed in part on rising demands for ethanol, which has pushed up corn prices.

Energy costs were up 0.7 percent in January with gasoline costs rising by 1.2 percent. Analysts said more price increases in this area are in the pipeline, given the spike in crude oil prices on Tuesday with a barrel of oil closing above $100 for the first time in history.

Medical costs showed a 0.5 percent increase, up from a 0.3 percent rise in December. Prescription drug prices shot up by 0.7 percent, the biggest rise in a year, while hospital prices were up by 1 percent.