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Rise in consumer prices pushes up interest rates

By Nell Henderson
The Washington Post

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Consumer prices rose in March for the fourth month in a row, the government reported yesterday, fanning inflation concerns and pushing up some interest rates.

The price figures followed a series of upbeat economic reports, prompting some economists and investors to predict the Federal Reserve may move as soon as summer to raise its target for overnight interest rates, after holding it at 1 percent since June.

The government's Consumer Price Index, one of the most widely followed measures of inflation, rose 0.5 percent last month, on a seasonally adjusted basis, a pickup from the 0.3 percent gain the month before, the Labor Department reported.

Excluding volatile energy and food costs, the so-called core CPI rose 0.4 percent in March, the biggest monthly increase since November 2001, and double the 0.2 percent increase posted in January and February.

Stocks fell initially but soon recovered and ended the day little changed. Bond prices tumbled, however, on worries that their value will be eroded by inflation. The value of the dollar climbed against other currencies on expectations that U.S. interest rates will rise.

The expectation that the Fed may raise rates soon, regardless of whether it turns out to be correct, has caused other interest rates — which are determined by financial markets — to increase. According to the Web site bankrate.com, the average rate for a 30-year-fixed rate mortgage was 5.56 percent yesterday, up from 5.48 percent last week; the average rate for a 48-month new-auto loan was 5.19 percent yesterday, up from 5.06 percent last week.

"March was clearly a strong month for the economy," said Stuart Hoffman, chief economist for PNC Financial Services Group, citing surges in job creation, retail sales and consumer prices. "The message to the markets is that interest rates are too low, and they're not waiting for the Fed. They're moving (rates) up."

In a separate report, the Commerce Department said the nation's trade deficit narrowed in February to $42.1 billion, from the record deficit of $43.5 billion in January, as U.S. exports grew faster than imports. That caused some economists to estimate the economy expanded rapidly the first three months of the year, at a nearly 5 percent annual rate, giving it plenty of momentum heading into the second quarter.

A year ago, the economy remained so weak and the inflation rate had fallen so low that Fed officials worried about deflation, a debilitating drop in overall prices that can be difficult to reverse.
 
Fed policy-makers lowered their target rate to 1 percent to spur economic growth and have said since that they can be patient in deciding when to raise it because inflation remains low, job growth has been disappointing and many businesses have unused production capacity.

Fed officials have said repeatedly that they do not intend to leave their target rate so low indefinitely. Very low rates encourage households and businesses to borrow and spend, which stimulates a sluggish economy.

But as the economy strengthens, it needs less stimulus. And a robust economy can overheat, hurting growth, if inappropriately low interest rates fuel overinvestment and high inflation. The challenge for the Fed is deciding when to start raising interest rates and how to prepare financial markets for the change.

Several Fed officials have made clear they will want to see sustained improvement in the job market and some evidence that it is translating into wage gains and inflation pressures before raising rates. But other Fed officials indicated they may be less patient.

Even with the recent price increases, the consumer inflation rate remains low. The CPI rose 1.7 percent in the 12 months that ended in March, while the core CPI rose 1.6. Those figures are within the range several individual Fed policy-makers have said they would be comfortable with. But the officials have been divided for months about where inflation is headed.

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