April 19 (Bloomberg) -- Inflation in the U.S. accelerated in March and prices excluding food and energy rose more than expected, posing a dilemma for Federal Reserve policy makers who signaled yesterday they may soon stop raising interest rates.

The 0.4 percent rise in the consumer price index followed a 0.1 percent increase in February and was led by higher costs for gasoline and rents, the Labor Department said today in Washington. So-called core prices rose 0.3 percent, exceeding economists' forecasts and the biggest jump since March 2005.

``This is a wake-up call,'' said Eric Green, chief market economist at Countrywide Securities Corp. in Calabasas, California, the biggest U.S. mortgage lender. ``It's going to keep the Fed focusing on upside risks'' to inflation, said Green, who correctly forecast the rise in the core rate.

Treasury notes fell as the report tempered speculation an expected increase in borrowing costs next month will be the last for some time. Policy makers said the end of rate increases was ``near,'' while maintaining that energy prices still posed a risk for inflation, according to minutes from the central bank's March 27-28 meeting released yesterday.

Economists predicted a 0.4 percent increase in the consumer price index, based on the median of 67 forecasts in a Bloomberg News survey. Core prices were forecast to rise 0.2 percent.

Paychecks

The increase in prices took a bigger bite out of Americans' paychecks. Average weekly earnings adjusted for inflation fell 0.3 percent in March and were up 0.1 percent in the last 12 months.

Consumer prices were up 3.4 percent for the 12 months ended in March, compared with a 3.6 percent year-over-year gain the previous month. Core prices were 2.1 percent higher, the same as in February.

The yield on the benchmark 10-year note climbed 4 basis points to 5.02 percent, at 5 p.m. in New York. Interest-rate futures show traders raised bets on the odds of a quarter-point increase on May 10 and June 29 to 36 percent, up from 34 percent yesterday. Traders have fully priced in an increase to 5 percent on May 10.

Some Fed officials have said they wouldn't be surprised by bigger increase in the rate of core inflation, though such an acceleration would likely be temporary.

``We haven't had much in the way of pass-through from past increases in energy and commodity prices to core inflation yet, but I wouldn't be surprised if some modest amount were evident in the next couple of quarters,'' San Francisco Fed President Janet Yellen told a group of business leaders in San Jose, California, yesterday. Assuming commodity prices level off, ``I would expect any pass-through of earlier increases to boost core inflation only temporarily,'' Yellen said.

Energy Prices

Energy prices rose 1.3 percent in March after falling 1.2 percent a month earlier. Fuel costs were up 17 percent in the last 12 months. Gasoline prices rose 3.6 percent in March.

A category designed to track rental prices rose 0.4 percent, the most since April 2004.

Food prices, which account for about a fifth of the index, rose 0.1 percent in March for a second month. Last month's gain was led by higher prices for beef and chicken.

Cars, Apparel

The cost of all goods including cars, apparel and food rose 0.6 percent last month after dropping 0.1 percent in February. Goods prices are 2.9 percent higher compared with March 2005. The increase was led by a 1 percent jump in clothing prices that was the biggest since April 1999.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Service prices rose 0.2 percent for a second month and are up 3.8 percent over the last year.

The cost of medical care rose 0.4 percent last month after a 0.5 percent increase in February. Housing costs, which include some energy costs and account for one-third of the index, rose 0.2 percent after rising 0.1 percent. Airfares jumped 1.1 percent last month and the cost of hotel stays rose 0.8 percent.

The travel industry is taking advantage of strong demand to lift prices and protect profits from the rise in commodity costs. UAL Corp.'s United Airlines, Delta Air Lines Inc. and AMR Corp.'s American Airlines raised some one-way fares by $50 earlier this month. Rising travel demand combined with fewer aircraft seats help the carriers charge more for tickets.

`Biggest Concern'

Hotels are also getting more for rooms. Occupancy was up to 68 percent in the week ended April 8 compared with the same period last year and the average room rate rose to $99.62 a day from $91.65 in 2005, according to figures from Smith Travel Research.

``Utility costs are our biggest concern'' after they've risen 10 percent to 15 percent, Bill Marriott, chief executive officer of Marriott International, said in an April 11 interview. ``We are able right now to increase room rates, primarily because the market is so strong. So we have been able to pretty much cover these costs.''

Lower joblessness and lack of spare capacity may make it possible for more companies to follow suit. The unemployment rate fell to 4.7 percent last month, matching a four-year low, and factories were the busiest in more than five years.

``Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much,'' minutes from the Fed's March 28 meeting that were released yesterday showed. ``Members also recognized that in current circumstances checking the upside risks to inflation was important.''

Energy prices are playing a central role in their thinking. The risk of rising energy and commodity prices having ``at least a temporary impact on core inflation remained a concern,'' according to the minutes.

Central bankers will raise their target interest rate by a quarter percentage point to 5 percent when they next meet on May 10, according to the median forecast of economists surveyed by Bloomberg News.

To contact the reporter on this story: Carlos Torres in Washington ctorres2@bloomberg.net

Last Updated: April 19, 2006 17:18 EDT