206618 Resource 178438 178984 178982 1213387658216 1213402937047 Controlled CPI rises 0.6% on Surging Energy Prices

Data in line with estimates: core rate up 0.2% on gains in costs of shelter

<table cellspacing="0" cellpadding="0"><tbody><tr><td class="blmw">By Rex Nutting, MarketWatch</td></tr><tr><td class="dtmw">Last Update: 11:15 AM ET 6/13/08</td></tr></tbody></table>WASHINGTON (MarketWatch) -- Surging energy costs drove U.S. consumer prices higher at the fastest pace in six months during May, but core inflation increased much less, Labor Department data showed Friday.The seasonally adjusted consumer price index rose 0.6% in May, worse than the 0.5% gain expected by economists. The core CPI, which excludes food and energy prices, rose 0.2% as expected. See Economic Calendar.Some economists cast the retail-level inflation data in a gloomy light. 'If the public is ratcheting up their [inflation] expectations, legitimately or not, the Fed has no choice but to respond.'Stephen Stanley, RBS Greenwich Capital"Not a bad number if you don't drive," commented Meny Grauman, an economist for CIBC World Markets. Inflation is "troublingly high," said Zach Pandl, an economist for Lehman Bros. Still, many observers saw some comfort in the relatively muted core inflation rates, which suggested that higher commodity prices aren't spilling over into other goods and services.After the CPI report, U.S. bond prices fell and investors pushed the major stock indexes broadly higher, though they'd come off their best levels of the morning. Based on the modest gains in core inflation, financial markets dialed back their expectations for aggressive interest-rate hikes from the Federal Reserve. However, futures markets are still pricing in two or three rate hikes by the end of the year as the U.S. central bank pivots away from fighting a recession and toward battling inflation.Other economic news released on Friday indicated the economy is still fragile. Consumer sentiment fell further in mid-June, dropping to a 28-year low, according to media reports of the University of Michigan/Reuters survey. Consumers' expectations for inflation over the next year eased slightly.Fed falloutThe CPI is up 4.2% in the past year and has risen at a 4.9% annual pace over the past three months. Inflation has overtaken weak growth as the top concern for financial markets and for some Fed officials.While headline inflation has been red hot due to soaring crude-oil prices, core measures of inflation have barely budged, a comforting sign that an inflationary spiral has not taken hold. If the Fed does its job, "higher food and energy prices will not translate into materially higher prices for other goods and services," wrote Mark Vitner, an economist for Wachovia. "The core CPI reflects the part of inflation the Fed can actually do something about. For all its power, the Fed can not make it rain or stop it from raining."The core CPI is up 2.3% in the past year, and has risen at a modest 1.8% annual pace over the past three months.Most Fed officials, including Chairman Ben Bernanke, are sticking to their forecast of moderating inflation in coming months in a reaction to the weaker U.S. economy. Still, Bernanke has said that the Fed will strongly resist any increase in inflationary expectations.Most Fed officials say that rising energy prices are reducing Americans' standard of living and slowing U.S. growth but that they are not feeding into an inflationary loop because wages have been stagnant. In May, real (inflation-adjusted) weekly earnings fell 0.4%, the Labor Department said in a separate report. Real wages are down 1.2% in the past year.Stabilization of consumers' inflation expectations could be vital. "If the public is ratcheting up their expectations, legitimately or not, the Fed has no choice but to respond," wrote Stephen Stanley, chief economist for RBS Greenwich Capital.The collapse of the housing market is having a direct impact on inflation. Shelter costs, which are by far the largest portion of the CPI with a 33% weighting, rose just 0.2% in May, while ownership equivalent rent increased 0.1%.Running hotIn May, energy prices were 4.4% higher after seasonal adjustments, the biggest gain since November. Gasoline prices rose 5.7% after seasonal adjustments, while natural-gas prices increased 5.5% and fuel oil prices jumped 10.4%.Food prices ticked 0.3% higher, with beef prices up 1.5%, while dairy, pork and fruit prices fell. Prices for bread and cereal rose 1.6%.The CPI rose 0.2% in April, and core prices were up 0.1%. Inflation was also modest in most other categories. Apparel prices fell 0.3% and are down 0.6% in the past year.Prices for medical care increased 0.2% and have risen just 1.8% on an annualized basis over the past three months. Drug prices fell 0.7%.New vehicle prices fell 0.1%, while air fares soared 3.2%, the biggest gain in six years.Recreation prices rose 0.1%, while education and communication prices grew 0.4%.<hr />Rex Nutting is Washington bureau chief of MarketWatch. <style></style><table width="100%" border="0"><tbody><tr><td class="mwAllianceCopyright" align="center"> </td></tr></tbody></table> 10 application/xml false consumer prices energy prices inflation Mozilla/4.0 (compatible; MSIE 7.0; Windows NT 5.1; .NET CLR 1.1.4322; .NET CLR 2.0.50727; .NET CLR 3.0.04506.30; .NET CLR 3.0.04506.648) 127.0.0.1 127.0.0.1 aheitland 75.160.24.218 false true false false true 178975 false false true false false false true 178438 blog blogsite/BestFlagstaffHomes/web