Washington, DC, Jun. 15--Consumer prices rose at their fastest clip in more than three years in May amid a surge in gasoline prices, all but ensuring that the Federal Reserve will raise interest rates at the end of this month.
The Consumer Price Index rose 0.6%, marking the largest increase since January 2001, the Labor Department said Tuesday. Higher food and energy prices accounted for much of that increase. The closely watched core index, which excludes food and energy items, rose a more moderate 0.2%, down from a 0.3% rate in April.
The increase in the overall index surpassed the 0.5% gain that Wall Street had been expecting, although the core increase matched expectations precisely. The numbers validated the Fed's worry that inflation--while still mild--is steadily approaching levels the central bank considers undesirable.
In year-on-year terms, core consumer prices were up 1.7% in May. The rate has been rising quickly this year, and some economists say it could reach 2.5% by December if the recent trend continues. So far this year, the core index has risen 2.9%, compared with a 1.1% gain for all of 2003.
Under the circumstances, economists have begun to speculate that the Fed could raise interest rates at a faster pace this year than Wall Street now expects. Until now financial markets have expected the Fed to raise its key federal funds rate in quarter-point increments every six to eight weeks, beginning June 30.
The Fed's key interest rate now stands at 1%, a 46-year low. Central bank officials have said they're likely to increase it gradually this year. But Fed Chairman Alan Greenspan said last week that judgment was based on an expectation of tame inflation.
"Should that judgment prove misplaced..., the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth," he said, referring to the Fed's policymaking Open Market Committee.
In its report Tuesday, the Labor Department said energy prices rose 4.6% in the biggest increase in four months. Gasoline prices rose 8.1%, also the biggest increase since January. Food prices rose 0.9%, marking the largest in 14 years as dairy prices climbed at the fastest pace since 1946.
Housing prices, which account for 40% of the index, rose 0.4%, the same rate as in April. Transportation prices rose 1.7%, the fastest clip in four months. Prices of new motor vehicles rose for the first time since February, climbing 0.l%. But medical-care prices moderated, rising 0.3% after a 0.4% gain in April.
