Tame April price rise eases inflation worry

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. consumer prices were tamer than expected in April on a lower energy price reading, giving the inflation-wary Federal Reserve a little breathing space as it seeks to fortify an anemic economy.

The 0.2 percent rise in the Consumer Price Index was less than the gain that Wall Street analysts polled by Reuters were expecting, a Labor Department report showed on Wednesday. The forecast was for an increase of 0.3 percent, following a March rise of 0.3 percent in the overall CPI. The core CPI, which excludes volatile food and energy prices, gained just 0.1 percent, or half the increase analysts had forecast.

News that price pressures might be more benign than believed drove stocks higher, while bonds prices fell. The dollar rose.

Analysts said the report suggested the Fed might have more latitude to keep interest rates low without sparking inflation as it seeks to support the economy and calm financial markets.

"One of the many risks the market sees is runaway inflation leading to a very quick re-rise in interest rates. This puts that off, at least in the near term," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.

The Fed has cut its benchmark interest rate, the fed funds rate, by 3.25 percentage points to 2 percent since September to counter weakness from collapsing housing markets and a credit crunch. Fed officials have signaled they want to let the effects of the rate cuts work their stimulative effect on the economy and are not inclined to cut rates further.

But skyrocketing prices for energy and food have sent inflation warning lights flashing, and some Fed officials have warned of the dangers of leaving price increases unheeded for too long.

April energy prices were unchanged after a 1.9 percent rise in March, as gasoline prices dropped 2 percent, the Labor Department said on Wednesday.

The government said the decline was due in part to seasonal adjustments. Gas prices normally rise in the first five months of the year, with the biggest increases occurring in March and April, the Labor Department said.

When not adjusted for seasonal swings, gasoline prices rose 5.6 percent in March.

In the meantime, energy prices rose 15.9 percent from the same time a year ago.

Other reports have pointed to higher energy prices in the pipeline for U.S. consumers. Crude oil prices hit a record high this week, likely pushing gasoline prices even higher from already record levels.

In fresh evidence of persistent price pressures, the Labor Department said food prices rose 0.9 percent in the month, the sharpest advance since January 1990.

"Plenty of risk still remains," said Kenneth Beauchemin, a U.S. economist for Global Insight in Lexington, Massachusetts. "To what extent, and when, the energy price onslaught embeds itself into core consumer prices, is an open question," he added.

Still, year-over-year consumer prices rose more modestly than forecast. Overall prices advanced 3.9 percent from April a year ago and core prices were up 2.3 percent. Analysts were expecting a 4.0 percent advance in overall prices and a 2.4 percent gain in core prices.