WRAPUP 2-US Feb consumer prices rise sharply on energy,food

www.forbes.com Reuters, 03.21.03, 5:03 PM ET By Tim Ahmann WASHINGTON, March 21 (Reuters) - U.S. consumer prices posted their biggest gain in more than two years in February as energy surged on the march to war with Iraq and food costs jumped, the government said on Friday. But the government's Consumer Price Index showed inflation well-contained apart from volatile food and energy costs. The CPI, the main U.S. inflation gauge, rose 0.6 percent last month, the Labor Department said. It was the biggest gain since a matching rise in January 2001 and was a touch above the O.5 percent increase expected on Wall Street. Energy prices shot up 5.9 percent, the largest increase since June 2000, while food costs staged their biggest climb since June 1996, gaining 0.7 percent. However, the so-called core CPI, which strips out food and energy, edged up just 0.1 percent, a notch below the 0.2 percent increase economists had expected and a sign that underlying inflation pressures were lacking. That meager gain brought the 12-month rise in core prices to just 1.7 percent, the smallest in nearly 37 years. In contrast, the overall CPI has risen a strong 3.0 percent over the last 12 months, mostly on higher energy costs. Markets shrugged off the data, focusing instead on the war in Iraq with investors' hopes rising that the conflict's toll on the U.S. economy would prove to be limited. Stock prices surged, with the blue chip Dow Jones industrial average <.DJI> closing up 235 points at 8,523, its best weekly gain since October 1982. Bonds sold off as investors scaled back expectations that the Federal Reserve might have to ride to the economy's rescue with interest rate cuts. A separate report released on Friday suggested the fate of the U.S. economy depends on a quick resolution of the U.S.-led war in Iraq. The Economic Cycle Research Institute said its weekly leading index fell to a 10-week low due to war worries. "If it is quicker and more decisive, we have a chance at tipping away from a recession," ECRI Managing Director Lakshman Achuthan said. "If something goes wrong and things get bogged down, we can tip toward more vulnerability which would lead to recession." OIL Many economists have worried a sharp increase in the price of oil in recent months, which helped pushed gasoline pump prices to a record high of $1.73 a gallon this week, would take a big bite out of consumers' wallets and slow the economy. Gasoline prices rose 9.9 percent in February, the largest monthly gain since June 2000, and the cost of heating oil spiked up 15.8 percent, the sharpest gain in three years. But relief may be on the way soon. Oil prices had climbed steeply through February after a now-ended workers' strike in Venezuela cut into supplies and as the United States prepared for war in Iraq. But as war began to appear inevitable and bombs started to drop, prices turned tail. Crude oil future prices fell to four-month lows in New York trade on Friday after U.S. and British troops seized control of key oil-producing areas in southern Iraq. Crude prices are now down a third from the 12-year high reached late last month. Comfortable that retail energy prices would soon recede, economists focused on the benign underlying inflation picture presented by the 0.1 percent rise in the core CPI. "Most people should not be concerned about inflation," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. The scant increase in core prices reflected a 0.2 percent drop in apparel costs, a 0.1 percent decrease in new vehicle prices and a 0.3 percent plunge in prescription drugs prices. An unchanged reading in shelter costs, which had been rising sharply, also helped hold core prices down. WHAT NEXT? Federal Reserve policymakers think inflation will likely drift lower this year given a high degree of slack in the economy, minutes from a January rate-setting meeting released on Thursday showed. However, officials spoke about a number of "crosscurrents" that made the inflation picture hard to judge. Still, the recent rise in oil and gold prices has eased fears that the United States could face deflation -- an outright drop in the general price level. "Inflation is in existence. We are nowhere near close to a deflationary environment," said David Durrant, chief currency strategist at Bank Julius Baer in New York. Rising service prices have ensured a modest inflation in the United States despite falling goods prices. Fed officials held interest rates steady at 1961 lows this week and said that given the high degree to which war clouds had shrouded the outlook, they could not "usefully" characterize whether economic risks were weighted toward inflation or weakness or balanced between them.