WRAPUP 3-Big rise in U.S. core inflation spooks Wall Street

May 17, 2006

(Updates with market close)
By Tim Ahmann

Reuters

WASHINGTON, May 17 (Reuters) - A big jump in energy costs pushed U.S. consumer prices up sharply last month, while rising rents led to a surprisingly steep gain in core prices, according to a government report on Wednesday that spooked financial markets.

The Labor Department said the consumer price index rose 0.6 percent in April, while the closely watched core index, which strips out volatile food and energy prices, rose 0.3 percent for a second consecutive month.

Both figures were above expectations on Wall Street, where economists had looked for overall prices to rise 0.5 percent, with core prices up just 0.2 percent.

The data sent stock markets reeling. The blue-chip Dow Jones industrial average <.DJI> closed down 214 points, its biggest one-day drop since March 2003, while the tech-laden Nasdaq composite <.IXIC> wiped out its gains for the year.

Prices for U.S. government bonds also took a dive as traders saw the strong inflation data as boosting odds of further interest-rate hikes from the U.S. central bank.

"It's time to get worried," said Brandeis University professor Stephen Cecchetti.

The Labor Department said half of the increase in the core inflation index was due to a 0.3 percent gain in shelter costs, with increases in the cost of apparel, medical care, and education and communication also contributing.

The rise in shelter costs reflected the second straight monthly 0.4 percent increase in the department's rents-based measure of owner-occupied housing costs, a sign the rental market may be tightening as Americans give up trying to buy.

Over the past 12 months, the core consumer price index has risen 2.3 percent, a pickup from the 2.1 percent gain registered in the period through March and the biggest 12-month advance in more than a year.

ENERGY COSTS HURT

Headline inflation has moved up even quicker because of big gains in energy costs, with overall consumer prices up 3.5 percent in the past 12 months.

Energy prices climbed 3.9 percent in April, building on a 1.3 percent March gain. Gasoline prices rose 8.8 percent in April and fuel oil costs increased 5.2 percent. Natural gas prices, however, slid 5.2 percent.

The big jump in energy prices over the last year has largely eroded whatever pay gains U.S. workers have managed to win. Over the past year, inflation-adjusted hourly earnings are up just 0.1 percent -- the first gain since last June.

Fed officials have been concerned that tightening labor markets and diminishing excess capacity at industrial firms, coupled with persistent pressure from lofty oil prices, could generate a broad-based pickup in inflation.

After raising the benchmark overnight lending rate last week for the 16th consecutive time, the Fed warned borrowing costs may have to move higher still given inflation risks.

Bets in futures markets for a 17th straight rate hike at the central bank's upcoming meeting in late June jumped as high as 58 percent on Wednesday, a 20 percentage point gain.

While the CPI data will raise eyebrows at the Fed, policy-makers focus more heavily on a separate inflation measure that does not put so much weight on rental costs.

Economists said the Fed could still pause in June to try to gauge whether the economy is downshifting to cooler growth.

Buttressing forecasts of a slowdown, the Commerce Department said on Tuesday that U.S. housing starts fell last month to their lowest annual pace since November 2004.

While economists saw that as a sign higher mortgage rates were slowing activity, the Mortgage Bankers Association said on Wednesday its seasonally adjusted index of mortgage application activity last week increased 4.6 percent. For details, see [ID:nN17139656]. (Additional reporting by Julie Haviv in New York)


U.S. stocks drop as inflation quickens

May 17, 2006

By Jennifer Coogan

NEW YORK, May 17 (Reuters) - U.S. stocks fell sharply on Wednesday after government data showed U.S. consumer prices rose faster than expected last month, stirring inflation worries.

In company news, Hewlett-Packard Co. (HPQ.N: Quote, Profile, Research), the No. 2 computer maker, bucked the trend, rising after it posted higher quarterly profit late on Tuesday. But HP was the sole gainer in the Dow industrials.

Rate-sensitive financial shares were among the top decliners on the S&P 500. Federal Reserve Chairman Ben Bernanke and other monetary policy-makers said last week the Fed might have to continue to raise rates to control inflation.

The Consumer Price Index rose 0.6 percent in April, the Labor Department said, above economists' forecast of 0.5 percent rise. Core CPI, which excludes food and energy costs, advanced 0.3 percent, also faster than a median forecast for a 0.2 percent rise.

"The core rate of inflation, which is the principal focus of the Federal Reserve, is somewhat higher than Chairman Bernanke and other governors will feel comfortable with," said Hugh Johnson, chief investment officer at Johnson Illington Advisors.

"It adds to the belief the Federal Reserve may raise rates further, and that is a problem for both the bond market and the stock market." Read more...

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U.S. Treasuries mostly flat in Asia ahead of data