Medical Costs Boost Consumer Prices

Wednesday, February 21, 2007

(02-21) 15:25 PST WASHINGTON (AP) --

Consumer prices increased at a faster pace than expected in January while a gauge of future economic activity posted a tiny increase, raising concerns about inflation and future growth.

The Consumer Price Index was up 0.2 percent in January as a big drop in energy prices only partially offset sizable increases in the cost of medical care, food, airline tickets and tobacco, the Labor Department reported Wednesday.

Core inflation, which excludes volatile energy and food components, rose 0.3 percent, the biggest one-month gain in seven months. Both figures were higher than economists had been expecting.

In other economic news, the Conference Board's index of leading economic indicators edged up a tiny 0.1 percent in January, far below the 0.6 percent December increase.

The January performance was held back by further weakness in the ailing housing and auto industries.

Economists said that the worse-than-expected news on inflation and future growth prospects was certain to get the attention of Federal Reserve Chairman Ben Bernanke and his colleagues.

The Fed on Wednesday released minutes of its meeting three weeks ago in which Fed officials expressed the view that inflation represented the biggest threat to the economy.

"All members agreed that the predominant concern remained the risk that inflation would fail to moderate as desired," the minutes stated.

On Wall Street, the Dow Jones industrial average fell 48.23 points to close at 12,738.41 as the jump in consumer prices and the Fed's comments on inflation rattled some investors. However, the technology-heavy Nasdaq composite index closed at a new high for the year.

The Fed left a key interest rate unchanged at 5.25 percent at the Jan. 30-31 meeting but continued to signal that future rate hikes are possible if inflation does not fall further.

"The latest report on consumer prices shows the Fed is right to be concerned about inflation," said Lyle Gramley, a former Fed board member and now senior economic adviser at Schwab Washington Research Group.

Gramley said the Fed could very likely resume raising interest rates by the end of this year if inflation pressures do not subside.

However, other economists said they still believed the Fed's next move would be to cut rates at the end of this year. These analysts believe that the central bank will achieve its hoped-for soft landing in which growth slows enough to lower inflation.

For January, energy prices dropped by 1.5 percent, but food prices were up 0.7 percent, the biggest rise since the spring of 2005, as the cost of dairy products, fruits and vegetables all showed big gains.

The cost of medical care shot up 0.8 percent, the biggest increase in more than 15 years, reflecting higher costs for prescription drugs and doctor services, which were rising in January at the fastest clip in 25 years.

Airline tickets jumped by 2.1 percent, the biggest gain since November 2004. The cost of tobacco products rose by 3.1 percent, the largest increase in 4 1/2 years.

"We got a nasty little surprise from the health care sector," said David Wyss, chief economist at Standard & Poor's in New York. "This is definitely a worrisome inflation report."

Analysts said many insurance plans overhaul their reimbursement schedules in January but the concern would be if the sharp increases continue in coming months.

The report on consumer prices came a week after Bernanke had relieved fears in financial markets about possible interest rate hikes because of inflation when he delivered the Fed's latest economic forecast to Congress.

For January, gasoline pump prices fell by 3 percent, leaving them 2.7 percent lower than they were a year ago and 32 percent lower than their peak in July of last year.

Natural gas and fuel oil costs were also down last month, giving a boost to consumers during the winter heating season. But the cost of electricity was up 2 percent, on a seasonally adjusted basis from the price in December.

The 0.3 percent rise in inflation excluding food and energy was the biggest increase in this category since a similar 0.3 percent rise in June of last year.

It left core prices rising by 2.7 percent over the past 12 months, far above the Fed's comfort zone of 1 percent to 2 percent increase in the core.

The Fed in the forecast Bernanke delivered to Congress last week predicted that inflation pressures will gradually decline over the next two years as growth remains moderate.

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