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U.S. inflation jumps
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February 21, 2001: 12:37 p.m. ET
Consumer Price Index surges 0.6% in January, double economists' forecasts
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NEW YORK (CNNfn) - Consumer prices in January rose at their fastest pace in 10 months, the government reported Wednesday, raising fears that the Federal Reserve may shy away from further interest rate cuts amid signs that inflation is creeping back into the economic picture.
The Consumer Price Index, the most closely watched U.S. inflation gauge, rose 0.6 percent last month, the biggest increase since last March and double economists' forecasts for a 0.3 percent gain. The jump follows three consecutive increases of a modest 0.2 percent in October through December.
Stock sank Wednesday amid nervousness about the data and continued weakness in the technology sector. The Dow industrials lost about 204 points to 10,526, while the ailing Nasdaq composite dropped 49 points to 2,268. Bond prices also lost ground, pushing yields higher.
The Labor Department said the jump was fueled by big price increases for natural gas, cigarettes and housing. Energy prices rose 3.9 percent, the biggest jump since September. Natural gas prices rose 17.4 percent, the largest one-month increase on record. Cigarette costs advanced at a 2 percent pace, while housing costs rose 1 percent.
 But several analysts said they do not see inflation gaining steam, saying that energy costs already are beginning to lessen and the jump in tobacco costs is not likely to continue.
Excluding the volatile food and energy sectors, consumer prices rose a higher-than-expected 0.3 percent in January, compared with the Briefing.com consensus forecast of a 0.2 percent increase and a 0.1 percent gain in the prior month.
Meanwhile, the Commerce Department said the U.S. trade deficit rose to an all-time high of $369.7 billion last year from $265 billion in 1999. China replaced Japan as the nation having the largest trade surplus with the United States, at $83.8 billion, 22 percent higher than in 1999.
However, the December trade deficit shrank for the third consecutive month, narrowing 0.4 percent to $33 billion.
What will the Fed do?
Investors have been on guard for rising signs of inflation. Last Friday, the government reported that inflation at the wholesale level surged a surprising 1.1 percent in January, the biggest increase in more than a decade. Many analysts, however, said that huge jump was a statistical aberration.
But the data raise questions about whether the Federal Reserve's rate-cutting efforts will continue. The Fed lowered interest rates twice last month in an attempt to revive the slowing economy, but worrisome signs about inflation could discourage the central bank from slashing rates again. The Fed has indicated that a lack of inflationary pressures has eased the way for rate cuts.
Most economists say they no longer expect another rate cut from the Fed prior to the central bank's March 20 meeting. Some analysts had thought the Fed would make a surprise move in a further attempt to ward off recession.
The latest economic reports present "a gut level problem for the Fed," said Bill Cheney, chief economist at John Hancock Financial Services.
"So long as inflation appeared to be absent, easing appeared to be a no-brainer," he told CNNfn's Before Hours. "Now you've got this specter of inflation rising from the dead, potentially, and that is going to make people a little queasy."
But Cheney said he thinks the Fed still may cut rates, saying that the central bank likely will conclude that inflation pressures will evaporate if the economy is seriously weakening. The Fed also will need more than one month's worth of data to be convinced that inflation is a problem, he said.
Meanwhile, in an interview with USA Today, Treasury Secretary Paul O'Neill said he thinks the economy isn't in recession and the worst of the economic slump may be over.
"My own sense is that we're not falling anymore," O'Neill told the newspaper. But, he said, more economic data need to come in before anyone can know for sure.
 Some experts say the economy is in danger of "stagflation" – a situation in which there's a mix of stagnant growth plus inflation.
But as long as energy prices decline, as expected, consumer prices should return to tamer levels, economist Bruce Steinberg of Merrill Lynch said.
"We believe we are not having stagflation, and that the CPI will improve as the economy slows because inflation is a slightly lagging indicator to economic growth," he said. "We believe the numbers we see in future months will be stripped away of the energy effects and be better than the one that has just been released for January." 
-- from staff and wire reports
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