Growth in Consumer Prices Looks Certain to Spur Rate Hike

Tweet

June 15, 2004 -- U.S. consumer prices surged 0.6 percent in May, largely due to soaring energy costs. The report by the Labor Department makes it almost certain the Federal Reserve will start raising interest rates from their current historical lows at the end of the month.

May's increase is the largest one-month leap since January 2001. However, core consumer prices, or those excluding volatile food and energy prices, grew a modest 0.2 percent for the month.

Energy prices jumped 4.6 percent in May, with gasoline prices leading the way, increasing 8.1 percent.

Consumer prices for all items grew 3.1 percent over the past 12 months. The core prices ticked up only 1.7 percent over the same period.

Prices tend to go up in an economic recovery. As demand grows, businesses often raise their prices. Firms seem to be preparing for such rising demand, as business inventories grew by 0.5 percent in April, according to a report released by the Commerce Department on Tuesday. The increase marked the eighth straight month of growth.

Comments from Fed Chairman Alan Greenspan have been preparing the markets for a rate increase. It is popularly expected that the Fed will raise its target for short-term interest rates by a quarter percent, up from their current 1 percent, a 46-year low.

Matt Quinn contributes to the Wall Street Journal's corporate finance blog. He has also written extensively about banking and corporate finance for publications including Inc., American Banker, and Financial Week. He lives in Brooklyn, New York.