Consumer Prices Rise Sharply on Oil, Food

asia.reuters.com Fri March 21, 2003 08:56 AM ET By Tim Ahmann

WASHINGTON (Reuters) - U.S. consumer prices posted their biggest gain 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.

The Consumer Price Index, the main U.S. inflation gauge, advanced 0.6 percent last month, the Labor Department said, outstripping the 0.5 percent increase expected by Wall Street economists.

Energy prices shot up 5.9 percent, the largest increase since June 2000 while food costs staged their biggest rise since June 1996, gaining 0.7 percent.

When food and energy were stripped out, prices were mostly well-contained with the 12-month gain in so-called core costs just 1.7 percent, the smallest in nearly 37 years. On the month, the core CPI edged up just 0.1 percent, below the 0.2 percent economists had expected.

However, overall consumer prices have risen a strong 3.0 percent over the last 12 months, mostly on higher energy costs.

Bond markets showed little reaction to the data, focusing instead on the progress of the U.S. conflict with Iraq.

Oil prices rose sharply through February after a now-ended workers' strike in Venezuela cut into supplies and as the United States prepared for war with Iraq. But in recent days, as war came to appear inevitable and as bombs began to drop, prices have reversed course, shedding a quarter of their value from recent highs. Crude oil futures were near a three-month low in European trade on Friday.

The Labor Department report showed a 9.9 percent increase in the price of gasoline, the largest monthly gain since June 2000, while the cost of fuel oil spiked up 15.8 percent, the sharpest increase since February of 2000.

As for food, prices for beef and veal shot up 3.3 percent, the steepest increase since January 1984. Pork prices rose 1.1 percent, poultry gained 1.2 percent and vegetable prices rose 1.5 percent. Labor said there were no special factors to account for the jump in food costs.

Federal Reserve policymakers believe inflation may be set to 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" -- including high oil prices -- that made the inflation picture hard to judge.

The recent rise in oil and other commodity prices have 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.

Fed officials held interest rates steady at 1961 lows this week and said they could not "usefully" characterize whether economic risks were weighted toward inflation or weakness or balanced between them given the high degree to which war clouds had shrouded the outlook.