December 14, 2007 / 3:21 PM / 11 years ago

Inflation hottest in two years, output solid

WASHINGTON (Reuters) - Consumer prices rose the most in more than two years in November as energy costs surged and a host of other prices marched higher, damping prospects of further interest-rate cuts from the Federal Reserve.

A Chevron oil refinery sits behind homes and office buildings in Richmond, California, November 6, 2007. Consumer prices jumped a bigger-than-expected 0.8 percent in November, the sharpest climb in more than two years and driven by surging energy costs, a government report released on Friday showed. REUTERS/Kimberly White

At the same time, production at the nation’s mines, factories and utilities rose a stronger-than-expected 0.3 percent last month, suggesting the economy may have a bit more steam than many analysts had thought.

The Labor Department said on Friday that the consumer price index jumped 0.8 percent in November, the biggest gain since September 2005, as energy costs leaped 5.7 percent.

Even stripping out fast-rising food and energy prices, the so-called core CPI rose a relatively steep 0.3 percent, the largest increase since January and ahead of the 0.2 percent rise expected on Wall Street.

“It puts the Fed in a little bit of a bind and people have to question how aggressive the Fed can be in cutting rates if inflation is rearing its ugly head,” said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

U.S. stocks and government bond prices fell while the dollar rose against major currencies as traders saw the data suggesting slimmer chances of further rate cuts from the Fed, which has lowered borrowing costs by a percentage point over the past three months. The Dow Jones industrial average .DJI closed down 178 points, or 1.3 percent.

“All of these dovish, weak-money individuals out there screaming for rate cuts really need a bucket of cold water in the face because if the Fed goes down that path we may have a bubble in the CPI,” said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

GASOLINE ON THE FIRE

Gasoline prices rose 9.3 percent last month, the steepest climb in half a year. Over the past 12 months, gasoline costs are up 37.1 percent, the biggest one-year gain since September 2005.

However, the increase in consumer prices was broadly based.

Apparel costs rose 0.8 percent, medical care prices increased 0.4 percent and owners’ equivalent rent — a gauge of the cost of home ownership that accounts for nearly one-quarter of the overall CPI — gained 0.3 percent.

Overall inflation rose 4.3 percent from November 2006, the steepest 12-month gain since June 2006, while core inflation rose 2.3 percent over the past 12 months, the biggest rise in seven months. During the first 11 months of 2007, inflation rose at a 4.2 percent annual rate, compared with 2.5 percent for all of 2006.

The report on November consumer prices followed producer price data on Thursday that showed an unexpectedly steep 3.2 percent climb, the biggest increase in 34 years.

Inflation in the 13-nation euro zone was also on the rise last month, with prices up 3.1 percent year-on-year, the steepest gain in six and a half years and a reminder that the Fed is not the only central bank struggling to tamp down inflation at a time growth is threatening to falter.

The U.S. central bank lowered benchmark overnight borrowing costs by a quarter point to 4.25 percent on Tuesday, the third rate cut since mid-September. The move was a bit of added insurance against the possibility a lengthy housing downturn and tighter credit could tip the economy into recession.

At the same time, policy-makers expressed concern that high energy and commodity prices could fuel broader inflation.

The implied chances of a rate cut at the Fed’s next meeting in January, as reflected in prices of interest rate futures, fell to 78 percent on Friday from 98 percent on Thursday.

FACTORY ACTIVITY STIRS

In a separate report on industrial output, the Fed said factory production rose 0.4 percent in November after a 0.6 percent drop in October, indicating the economy retained some resilience despite being hobbled by the housing downturn.

The manufacturing figure was helped by a 1.7 percent rise in motor vehicle and parts production and a 2.1 percent increase in computer and electronics products output.

Excluding motor vehicle production, industrial output was up 0.2 percent in November.

While industrial activity last month was stronger than economists had expected, the Fed revised its measure of October output downward, saying production dropped 0.7 percent and not 0.5 percent as originally reported. It was the largest drop since October 2005.

“While the industrial production data are encouraging ... less than half of manufacturing industries appear to be growing,” said Cliff Waldman, economist for the Manufacturers Alliance/MAPI. “The economic climate remains treacherous.”

Additional reporting by David Lawder

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