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U.S. Economy: Inflation Cools Outside of Food, Energy

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April 15 (Bloomberg) -- Price gains for U.S. goods and services other than food and fuel unexpectedly cooled in March, supporting Federal Reserve Chairman Ben S. Bernanke’s view that the surge in commodity costs will not cause inflation to flare.

The consumer-price index excluding volatile food and energy charges rose 0.1 percent, less than the 0.2 percent increase projected by the median forecast of economists surveyed by Bloomberg News, according to Labor Department data today in Washington. Other reports showed manufacturing kept leading the recovery and consumer confidence climbed more than projected.

A decrease in wages adjusted for inflation in four of the past five months means retailers and service providers will have a hard time passing price increases along to customers struggling to make ends meet. Treasury securities rose as the figures supported Bernanke and Fed Vice Chairman Janet Yellen, who’ve said the jump in commodity costs will probably be temporary.

“Everything is going according to plan” for Bernanke and Yellen, said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Consumers are feeling the pinch from higher prices at the pump and the grocery store, but prices outside of that are very tame.”

The benchmark 10-year Treasury note headed for its first five-day gain in almost a month. The security’s yield, which moves inversely to prices, fell to 3.41 percent at 4:45 p.m. in New York from 3.50 percent late yesterday. Shares also rose, sending the Standard and Poor’s 500 Index up 0.4 percent to 1,319.68 at the 4 p.m. close in New York.

Factory Rebound

Industrial production increased more than forecast in March, and manufacturing in the New York region expanded this month by the most in a year, other reports today showed.

Output rose 0.8 percent, the fifth straight gain, after a revised 0.1 percent rise in February, according to data from the Fed. Manufacturing, which makes up 75 percent of the total, climbed 0.7 percent following a 0.6 percent increase.

The Federal Reserve Bank of New York’s so-called Empire State factory index increased to 21.7 from 17.5 the prior month. Readings greater than zero signal growth.

Factories are benefiting from gains in business investment, expanding economies overseas and inventory rebuilding. The pace of production may cool temporarily as some factories try to replace supplies of parts interrupted after last month’s earthquake and tsunami in Japan.

Taking Shape

“The economy is really starting to take shape,” said Bricklin Dwyer, an economist at BNP Paribas in New York. While “we expect a cool down” in the next couple of months because of events in Japan, that will be “a short-lived phenomenon,” he said. “We’ve seen global manufacturing increase since the crisis.”

Consumer prices including food and fuel increased 0.5 percent in March for a second month, in line with the median forecast of economists surveyed by Bloomberg News, the Labor Department’s report showed.

Forecasts for consumer prices in the Bloomberg survey of 82 economists ranged from gains of 0.3 percent to 0.9 percent.

Economists projected the core gauge, which excludes food and energy, would rise 0.2 percent, according to the survey median. Last month’s reading was restrained by lower clothing expenses and smaller gains in medical care.

Americans became less concerned about inflation this month, another report showed. Confidence climbed in April from a 16-month low, indicating job gains are helping Americans cope with rising fuel costs, according to figures from Thomson Reuters/University of Michigan.

Sentiment Improves

The group’s preliminary index of consumer sentiment rose to 69.6, higher than forecast, from March’s 67.5 reading that was the lowest since November 2009. The gauge was projected to rise to 68.8, according to the median forecast of 66 economists surveyed by Bloomberg News.

Consumers surveyed said they expected an inflation rate of 4.6 percent over the next 12 months, the same as in the March survey and the highest since August 2008. Over the next five years, the figures tracked by Fed policy makers, Americans expected a 2.9 percent rate of inflation, down from 3.2 percent the prior month.

The pickup in food and fuel prices has exposed a rift among policy makers. Bernanke, Yellen and Federal Reserve Bank of New York President William C. Dudley are among those who’ve said the jump in prices will probably be temporary because the economic expansion is still too fragile to support broad-based cost gains.

Fed Rift

That’s put them at odds with regional Fed Bank presidents like Charles Plosser of Philadelphia, Richard Fisher of Dallas and Jeffrey Lacker of Richmond who have said the central bank should remove monetary stimulus before inflation flares.

Consumer prices increased 2.7 percent in the 12 months ended March, the biggest year-to-year gain since December 2009. The core CPI rose 1.2 percent from March 2010. As recently as October, the year-over-year gain had slowed to 0.6 percent, the smallest since records began in 1958.

Rising prices have prompted economists surveyed by Bloomberg to lower their forecasts for inflation-adjusted consumer spending. Purchases increased at a 2 percent annual rate in the first quarter after a 4 percent gain in the last three months of 2010.

Inflation-Adjusted Wages

Average hourly earnings adjusted for inflation dropped 0.6 percent in March, the most since June 2009, after falling 0.5 percent the prior month, a separate release from the Labor Department showed today. Earnings were down 1 percent over the past 12 months, the biggest year-to-year drop since September 2008.

Some companies are saying they will test the waters on price increases later this year.

“We are now seeing significant cost-price inflation, which will manifest itself late in 2011, particularly in raw materials such as cotton and wool,” R. Neal Black, chief executive officer of Jos. A. Bank Clothiers Inc. said in a March 31 teleconference. “The result will be selected retail price ticket increases throughout 2011, testing the customer’s capacity to absorb small increases.”

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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