Inflation is eating US wage gains

Consumers are being buffeted from several directions. The resurgence of inflation comes even as homeowners face a dip in property values and as the stock market has sagged from a recent peak. All this dragged consumer confidence down a notch in an index released Friday by the University of Michigan.

These economic crosswinds also pose a challenge for Federal Reserve policymakers. At a meeting Tuesday and Wednesday, they will weigh the risks to the economy – whether the threat of inflation is greater than the opposing forces that could cause an economic slowdown.

Many investors have been anticipating that the Fed will cut its short-term interest rate later this spring. That would help ensure that the housing downturn doesn't push the nation into a recession.

To pave the way for such a move, the Fed could first announce a "neutral" policy stance, rather than its current inflation-fighting bias toward raising interest rates.

But the latest news on consumer prices is dimming hopes for both the tonal shift and a subsequent interest-rate cut.

Not everyone has given up on the possibility of some easing by the Fed. But it now looks less imminent.

"The Fed will be on hold for the balance of this year," predicts Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. He says surveys of wholesale and retail prices "are suggesting that inflation is not entirely under control."

In fact, the Labor Department's consumer price index on Friday showed price momentum in a wide range of goods. Food, clothing, shelter, medical care, energy, and airline tickets all posted sizable gains in February.

Some of the recent price changes may represent one-time shocks. Beef prices are reacting, in part, to a devastating storm that buried cattle country in snow. The higher costs for fresh vegetables and fruits such as oranges can be attributed in part to bad weather. Oil and gasoline prices have gone up and down based on forecasts for demand, production quotas set by OPEC nations, and glitches at refineries.

But if the Fed doesn't need to worry about any one price, it does have the task of watching the overall price level. A loose monetary policy can allow a broader cycle of price hikes in the economy, damaging consumer and investor confidence. Such a spiral, once started, can be hard to stop.

The Fed wants "to maintain a healthy investment environment where investors are not seeing their ... returns eaten by rising prices," says Mr. Tannenbaum. That stability helps businesses create jobs and boost productivity, allowing workers' real income to rise.

Some economists say a cooling economy will help to tame inflation. Prices have been falling, in fact, for cars, computer equipment, and other categories that respond to cyclical swings by consumers.

Other analysts are skeptical that the economy is slowing down. Mr. Darda expects both output and inflation to show surprising strength.

"I think we're going to end the year with core inflation much closer to 3 than to 2.5" percent, compared with 12 months before, Darda says. The Fed may not act soon, but "the next move is probably a tightening."

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