Washington – Sticker shock may be spreading.
It’s not only motorists filling up at the pumps who are getting clobbered. Clothes shoppers, students, airline travelers, the sick in hospitals and others are seeing prices march higher.
All told, consumer prices vaulted by 0.6 percent in April, fueling concerns the Federal Reserve might keep pushing up interest rates to fend off inflation. Discouraged Wall Street investors sent stocks tumbling.
High prices for gasoline and other energy products have played a major role in the spikes seen over the past two months.
“This year was the first time I ever saw an Xcel heating bill above $500 a month,” said Vincent Vann, an information technology supervisor with the city of Denver.
But the prices of lots of other goods and services also are climbing. Westminster resident Matt Odell said his landlord planned a 12 percent rent increase, starting in June.
Odell negotiated the increase down to 8.5 percent, but his rent will still rise from $820 to $890 a month.
“That was as good as I could do,” Odell said. “That extra money will cut into my travel budget.”
The increase in the closely watched Consumer Price Index was the biggest jump in three months, the Labor Department said Wednesday. That followed an already strong 0.4 percent advance in March.
“The whiff of inflation is feeling more like a gust,” observed Richard Yamarone, economist at Argus Research. “The inflation picture is worsening.”
On Wall Street, stocks plunged. The Dow Jones industrials plummeted 214.28 points to close at 11,205.61 in the biggest single-session slide since March 24, 2003.
Some Colorado money managers took the decline in stride.
“The market is spooked,” said Fred Taylor, a money manager at Northstar Investment Advisors in Denver. “But I’m not surprised by the selloff, because we had such a good first quarter.”
Taylor said Wall Street’s rally to start 2006 was fueled in part by investor speculation in energy, gold and industrial stocks, a scenario that made a market correction almost inevitable.
He advised homeowners with adjustable-rate mortgages to convert their loans to fixed-rate mortgages in anticipation of more rate hikes. He also suggested that investors funnel cash into tax-sheltered investments such as IRAs or work-sponsored 401(k) plans and money-market funds until stocks appear poised to rally.
Excluding energy and food prices, “core” prices went up 0.3 percent in April for the second month in a row. The sizable back-to-back increases suggested that rising energy costs may be starting to breed wider inflation throughout the economy.
Stuart Hoffman, chief economist at PNC Financial Services Group, described the inflation performance as “rotten to the core.” He and other economists said it indicates that more companies are passing along some of their higher costs for energy and other materials to consumers.
“The problem for the Fed is that we are seeing higher costs in a growing number of places,” said Joel Naroff of Naroff Economic Advisors.
The latest inflation readings were higher than economists had anticipated. They had forecast a 0.5 percent increase in overall consumer prices and a 0.2 percent rise in core prices.
So far this year, consumer prices are rising at an annual rate of 5.1 percent, much faster than the 3.4 percent increase registered for all of 2005. Core prices are advancing at a brisk 3 percent pace, compared with a more moderate 2.2 percent rise for last year.
Fed’s options wide open
Some believe the policymakers, despite price hikes, will leave the interest rate alone in June.
To thwart inflation, the Federal Reserve bumped up the target for the federal funds rate last week to a five-year high of 5 percent. It was the 16th increase in a row since the Fed began to tighten credit in June 2004.
Fed policymakers left options for future decisions wide open.
They suggested another increase might be possible, or they could take a pause in their rate-raising campaign depending on how inflation and economic activity unfold.
A growing number of economists said Wednesday’s inflation report raises the chances for another rate increase at the Fed’s next meeting, June 28-29.
“I conclude that higher interest rates are in our future,” said Brandeis University economics professor Stephen Cecchetti.
Some, however, still believe the Fed will leave rates alone at the June meeting on grounds that slower economic growth will eventually ease inflation pressures.
The economy in the first quarter of this year grew at a brisk 4.8 percent pace, the fastest in 2 1/2 years. Growth is expected to slow to about a 3 percent pace in the April-to-June period, which would still be healthy.
One of the things the Fed will be keeping close tabs on is how energy prices affect inflation and economic activity.
Energy prices can make inflation worse. They also can crimp overall economic activity by forcing consumers to pare their spending and investment. Or, high energy prices can result in both scenarios – which would be a tricky problem for the Fed to deal with. To counter inflation, the Fed would be inclined to boost interest rates. To treat economic weakness, the Fed would want to leave rates alone or, in more serious cases, lower them.
Crude oil prices hit a record high of $75.17 a barrel in late April; they are now hovering above $68 a barrel. That has helped push up prices at the gasoline pumps to $3 a gallon in some areas.
Wednesday’s report said energy prices shot up 3.9 percent in April, the most since January. Gasoline prices jumped 8.8 percent. Fuel oil prices went up 5.2 percent.
Other prices also bounded ahead last month. Airline fares rose 1.6 percent, the most in nine months.
Hospital and other related services climbed 0.8 percent, the most in two months. Clothing prices increased 0.6 percent. Education costs, including tuition and books, rose 0.5 percent. Prices for shelter, a broad category including rent, went up 0.3 percent.
There were a few bright spots for shoppers. Food prices were flat in April. Computer prices dropped 2.6 percent. Prices for tobacco and smoking products dipped 0.2 percent.
Against the backdrop of mostly rising prices, workers are seeing only small gains in their paychecks.
“Salaries are not in line with the cost of living,” said Vincent Vann of Denver. To make ends meet, Vann said he has refinanced his home and cut back on expenses.
Denver Post staff writers Aldo Svaldi and Will Shanley contributed to this report.
