Higher gasoline prices helped push consumer prices up 0.4 percent in April. But excluding energy and food increases, consumer prices, as measured by the Consumer Price Index, hardly budged last month.
Wall Street was closely watching the CPI numbers, as well as April retail sales, which fell 0.3 percent.
"These were very favorable numbers," says John Burgess, managing director of global investments at Bankers Trust Company in New York. Yet he doubts the numbers will settle the growing economic disagreement among economists over the future direction of interest rates. "These inflation numbers are lagging indicators," he explains.
Robert Dederick, a consulting economist at Northern Trust Company in Chicago, says the latest economic numbers will keep the Federal Reserve on the sidelines when it meets on May 21.
"These reports did not indicate the Fed will have to tighten," he remarks.
Still, some economists believe the Fed will raise interest rates on July 3. Mr. Burgess says he would not be surprised to see the Fed "tighten once or twice more during the year." Some economists maintain the tightening could be significant as the world economy starts to perk up. If US exports soar, wage and price pressures could build up.
A smaller group of economists predicts the economy will start to lose steam. They argue that the higher growth in the first half of this year will steal growth from the second half. Already, auto company executives are predicting slower sales later in the year. April retail sales indicated a slowing last month. Some economists predict an economic downturn next year.
"These numbers will not settle that argument," Mr. Dederick says.
In early trading on May 14, the bond and stock markets moved higher on the inflation news.
Despite the stock market's optimism, some economists worry about inflation trends. "My own feeling is that the fundamentals are deteriorating gradually as the year goes on," says Lyle Gramley, an economist at the Mortgage Bankers Association, Washington.
What direction rates take in coming months will be vital to everyone from businesses to home buyers and mutual-fund shareholders. Already this year, rising rates have hurt investors in bond funds, for example.
Given the Fed's inflation-fighting mission, price pressures are a key to the the interest rate outlook.
Mr. Gramley, a former Federal Reserve governor, is not worried about the rise in energy prices. So far this year, a significant portion of the inflation rise can be traced to higher energy prices - the result of low inventories, a harsh winter, and a stronger recovery.
Instead, Gramley worries that the US economy is growing at a faster pace than it can sustain. This year, he expects 2.75 percent annual growth on a fourth quarter to fourth quarter basis, compared with the 2 to 2.25 percent growth rate that he says the economy is capable of sustaining.
Economists are also watching the debate in Congress over the minimum wage. If Congress increases the wage from $4.25 per hour to $5.15 over two years, it could add as much as 0.2 to 0.3 percentage points to the CPI for the next two years, some economists estimate.
This modest gain in prices could easily be overshadowed by a spurt in food prices later in the year. Last week, the United States Agriculture Department predicted a poor winter wheat crop. This may result in higher meat prices next year. Ranchers, strapped for cash to pay for feed, are already beginning to reduce the size of their herds.
Economists believe the key to modest increases in food prices will be a healthy corn crop. Farmers have indicated they are going to plant a lot of corn, since prices are high. "If there is a good crop, next year's food prices won't be up much, but if it is not a good crop, there are some estimates retail food prices could go up 5 to 10 percent," Gramley says.
Some economists are also starting to worry about price increases in the service sector. "We see ATM [bank machine] fees, checking costs, mass-transit increases, higher rents, and entertainment all showing speedier price gains for the last six to nine months," says economist William Sullivan at Dean Witter Reynolds in New York.
With signs of price inflation, senior economist Dan Seto of Nikko Securities Company International worries about the effect on the labor market. "If inflation shows up in the labor market, it is very hard to unravel," he says. Although there are no concrete signs of wage inflation, organized labor has started a campaign called "America Needs a Raise" for larger pay increases. Union publications are now full of stories about workers seeking higher wages instead of job security.
Despite the union attempts, labor economist Audrey Freedman sees no sign of a wage spurt.
"Union negotiators don't have the same power they used to have," she says. The AFL-CIO is trying to increase its membership by signing on low-wage workers, she notes. And even if labor is successful, "it will be a long time until it shows up in the numbers."