Inflation pressures ease despite food price jump

May 14, 2008 9:18:09 PM PDT
Consumer prices slowed in April despite the biggest jump in food costs in nearly two decades. But with oil near record levels, Americans should brace for more pain at the pump in coming months. The Labor Department reported Wednesday that consumer prices edged up 0.2 percent last month, slightly lower than expected and better than the 0.3 percent rise in March.

The lower inflation reflected a flat reading for energy, which helped offset a 0.9 percent jump in food. That was the biggest one-month surge since a 1.5 percent increase in January 1990.

Last month's increase was driven by widespread increases in a number of areas from bread, butter and margarine to milk and coffee. Food prices have been climbing rapidly over the past year, reflecting higher world demand and the impact of increasing energy prices on the cost of fertilizer and transportation of products to grocery store shelves.

For April, energy prices were unchanged and gasoline prices even fell by 2 percent, a decline that would strike motorists as strange, given that they have been watching the price of gasoline rise relentlessly in recent weeks.

However, since gasoline prices normally rise in April, the 5.6 percent increase in gasoline prices for the month was turned into a 2 percent drop after the government adjusted for normal seasonal variations - little comfort to people now paying pump prices that hit a new national record of $3.758 per gallon on Thursday, up nearly 40 cents in the past month.

Outside of the volatile food and energy sectors, so-called core inflation showed a modest 0.1 percent rise in April, down from 0.2 percent in March, a performance that economists said should continue as the weakening economy and rising layoffs help keep the lid on price increases.

"The recent slowdown in the United States is definitely helping to contain inflation," said Rebecca Braeu, an economist at John Hancock Financial in Boston.

But analysts said many families are continuing to be squeezed.

"We are paying more to fill up our tank and buy a loaf of bread and a gallon of milk," said Mark Zandi, chief economist at Moody's Economy.com. "It's going to be tough to go to the grocery store this summer or drive to the beach."

Zandi said gasoline prices will also likely increase by a significant amount in May as pump prices reflect the recent run-up in crude oil prices, which remained above $124 per barrel on Wednesday.

On Wall Street, the Dow Jones industrial average rose 66.20 points to close at 12,898.38 as investors took comfort in the lower inflation readings.

The grocery industry urged Congress to revise current requirements designed to divert corn production to be used to make ethanol, which they blamed for pushing food prices higher.

"It's clear that American families are facing unbearable pressure, pressure that Congress can help relieve by revisiting and revising the mandated diversion of corn to ethanol production," said Scott Faber, vice president for federal affairs for the Grocery Manufacturers Association.

The Fed, fighting against a severe credit crunch and spreading economic weakness, has cut interest rates seven times since last September to keep the country from toppling into a recession. However, last month it signaled it might take a pause in the rate cuts, with some Fed officials expressing worries that further reductions in interest rates could trigger unwanted inflation. The central bank is expected to keep rates unchanged when officials next meet June 24-25.

So far this year, overall inflation is rising at an annual rate of 3 percent, down from a 4.1 percent increase for all of 2007. Core inflation, excluding energy and food, is up at an annual rate of 1.8 percent in the first four months of this year, compared with a 2.4 percent increase for all of 2007.

But workers' wages are not keeping up. A separate Labor Department report showed average weekly earnings for nonsupervisory workers dropped by 1 percent in April compared with a year ago, after adjusting for inflation. It was the seventh straight month that inflation-adjusted wages were down compared with a year ago.

While many economists believe the country is in a recession, others say the country may be able to avoid a full-blown downturn, especially if consumers spend a sizable portion of the 130 million economic stimulus payments the government is now sending out.

Clothing prices rose by 0.5 percent in April, even though discount stores reportedly engaged in heavy discounting in an effort to spur lagging sales, but airline ticket prices dropped by 0.5 percent and new car prices fell by 0.2 percent.


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