Higher consumer prices rouse inflation concerns

Consumer prices increased at a faster pace than expected in January while a gauge of future economic activity posted a tiny increase, raising concerns about inflation and future growth.

The consumer price index was up 0.2% in January as a big drop in energy prices only partially offset sizable increases in the cost of medical care, food, airline tickets and tobacco, the Labor Department reported Wednesday.

Core inflation, which excludes volatile energy and food components, rose 0.3%, the biggest one-month gain in seven months. Both figures were higher than economists had been expecting.

In other economic news, the Conference Board’s index of leading economic indicators edged up 0.1% in January, far below the 0.6% increase in December.

The January performance was held back by further weakness in the ailing housing and auto industries.

Economists said the worse-than-expected news on inflation and future growth prospects was certain to get the attention of Federal Reserve Chairman Ben S. Bernanke and his colleagues.

The Fed on Wednesday released minutes of its meeting three weeks ago in which Fed officials expressed the view that inflation represented the biggest threat to the economy.

“All members agreed that the predominant concern remained the risk that inflation would fail to moderate as desired,” the minutes stated.

The Fed left a key interest rate unchanged at 5.25% at the Jan. 30-31 meeting but continued to signal that future rate hikes were possible if inflation did not fall further.

“The latest report on consumer prices shows the Fed is right to be concerned about inflation,” said Lyle Gramley, a former Fed board member who is now senior economic advisor at Schwab Washington Research Group.

Gramley said the Fed was very likely to resume raising interest rates by the end of this year if inflation pressures did not subside.

However, other economists said they thought that the Fed’s next move would be to cut rates at the end of this year. These analysts believe that the central bank will achieve its hoped-for soft landing in which growth slows enough to lower inflation.

For January, energy prices dropped by 1.5%, but food prices were up 0.7%, the biggest rise since the spring of 2005, as the cost of dairy products, fruits and vegetables all showed big gains.

The cost of medical care shot up 0.8%, the biggest increase in more than 15 years, reflecting higher costs for prescription drugs and doctor services, which were rising in January at the fastest clip in 25 years.

Airline tickets jumped by 2.1%, the biggest gain since November 2004. The cost of tobacco products rose by 3.1%, the largest increase in 4 1/2 years.

Gasoline pump prices fell by 3% in January, leaving them 2.7% lower than they were a year earlier and 32% lower than their peak in July.

Natural gas and fuel oil costs also were down last month, giving a boost to consumers during the winter heating season. But the cost of electricity was up 2% on a seasonally adjusted basis from the price in December.

The 0.3% rise in inflation excluding food and energy was the biggest increase in this category since a similar 0.3% rise in June.

It left core prices rising by 2.7% over the last 12 months, far above the Fed’s comfort zone of 1% to 2%.