January Inflation Increases Modestly

Consumer prices rose only moderately in January as low costs for everything from food to new cars helped offset a surge in energy, the Labor Department said Friday.

The 0.3% rise in the consumer price index, the government’s main inflation gauge, allayed concerns about building price pressures sparked by a report Thursday showing an unexpectedly large jump in wholesale prices.

The rise in the CPI was the biggest since April 2002, but it was overwhelmingly driven by energy costs that soared 4% on the back of frigid weather and worries about a possible U.S. war with Iraq.

The core CPI, which strips out volatile food and energy costs, rose only 0.1% -- less than the 0.2% increase projected by economists.

“Consumers have shut off the ability for producers to raise prices,” said Kurt Karl, chief economist with Swiss Re in New York. “There’s so much competition on the retail level. You have to give them discounts.”

The Labor Department said Thursday that its producer price index, which measures prices at the farm and factory gate, shot up 1.6%. That report led some economists to fret that Federal Reserve Chairman Alan Greenspan had spoken too soon when he said in congressional testimony last week that there was little sign of inflation in the economy.

If inflation were to break higher, it could complicate an already uncertain U.S. economic picture by limiting the leeway of the Fed to use lower interest rates to spur growth.

The Fed is expected to hold rates steady at its next meeting March 18, but might need to consider raising them later in the year if inflation were to threaten an acceleration.

In addition to constraining the Fed, higher prices would crimp the purchasing power of consumers, who already are grappling with slow wage gains in a weak job market.

The Labor Department said that inflation-adjusted weekly earnings for U.S. workers didn’t budge in January. They were up a mere 0.4% in the 12 months ended in January.

With consumer demand soft, prices in a variety of categories of the January CPI were subdued. Food prices fell 0.2%, the biggest drop since January 1997. Apparel and new-car prices both slid 0.9%.

Even medical-care costs, which typically outpace other components, rose just 0.1% -- the smallest rise since January 1998.

Housing prices, which make up more than 40% of the CPI, rose by 0.4%, offsetting weakness elsewhere.

Fuel oil costs surged by 8.6%, natural gas climbed 4.6% and gasoline prices jumped 6.6%.

During the last 12 months, the CPI has risen 2.6% overall and 1.9% excluding food and energy.