Economy
Paul Sakuma  /  AP
John Garcia organizes vegetables on display at a grocery store in Palo Alto, Calif., Tuesday. Inflation rose in March as the costs of energy and food both climbed.
updated 4/16/2008 5:52:54 PM ET 2008-04-16T21:52:54

Inflation rose again last month, reflecting big jumps in the cost of energy and airline tickets. And the forecast is for even bigger energy-related increases to come, including the possibility of $4 per gallon gasoline by Memorial Day.

Those inflation pressures are occurring just as the economy seems to be sinking into a recession, with consumers cutting back on spending and the housing industry, where all the troubles started, sinking further.

That was the somber news from a batch of economic reports released Wednesday that depicted an economy still struggling with multiple problems from a prolonged slump in housing, soaring energy prices, a severe credit crisis and rising unemployment.

The Labor Department said consumer prices rose by 0.3 percent in March, after being unchanged in February, as energy prices jumped by 1.9 percent and airline fares, reflecting higher fuel costs, increased 3 percent, the biggest one-month gain in six years.

Food prices, which have been steadily rising for more than a year, were up by 0.2 percent in March and 4.4 percent over the past 12 months. The price of some food staples showed even bigger increases over the past year, including a 14.7 percent rise in the price of bread and a 13.3 percent increase in milk prices over the past year.

With crude oil prices briefly touching a new record near $115 per barrel this week, and food prices remaining under pressure because of global shortages, analysts predicted consumers will feel more inflation pressures in the months ahead.

Gasoline pump prices hit a new nationwide record of $3.40 per gallon on Wednesday, up 53 cents from a year ago, according to the Oil Price Information Service and AAA, and many economists believe that price will hit $4 per gallon by Memorial Day.

Video: Food inflation “People are going to be paying a lot more for gasoline and groceries in the months ahead,” said Mark Zandi, chief economist at Moody’s Economy.com. “Nothing is going right at the moment. That is why consumer confidence has fallen to the lowest point since the early 1980s.”

Wall Street ignored all the bad economic data and instead focused on better-than-expected quarterly results from JPMorgan Chase and two other companies to send stocks higher. The Dow Jones industrial average rose 256.80 points Wednesday to close at 12,619.27.

Zandi said the rise in food and fuel prices has been a significant drain on consumers’ purchasing power, another reason he and other analysts believe the country has fallen into a recession. Consumer spending accounts for two-thirds of economic activity.

While the Bush administration is hoping that economic stimulus checks being mailed to households starting next month will make any slump short and mild, Zandi said the $100 billion in payments consumers will get this year will be just enough to offset their higher gasoline bills, leaving nothing left to boost consumer spending in other areas.

Major Market Indices

In its latest look at business activity around the country, the Federal Reserve said Wednesday that “economic conditions have weakened,” citing sluggish consumer spending and rising costs to businesses for raw materials.

Many analysts expect the Fed, which has been aggressively cutting interest rates and shoveling money into the banking system to combat the credit squeeze, will cut rates again when officials next meet on April 29-30.

The Fed also reported Wednesday that industrial output managed a 0.3 percent rise in March but the gain in manufacturing was a weak 0.1 percent as auto production continued to fall.

And the housing industry, where the troubles began two years ago, remained under severe strain with construction of new homes and apartments plunging by 11.9 percent in March, the Commerce Department reported, double what had been expected, to a seasonally adjusted annual rate of 947,000 units, the slowest pace in 17 years.

Many analysts said construction is likely to fall more in coming months, reflecting a huge overhang of unsold homes that includes not only new homes but also houses being dumped on the market as foreclosures rise to record levels.

For March, construction fell in all parts of the country, led by a 21.4 percent drop in the Midwest and declines of 12.6 percent in the South, 8.5 percent in the Northeast and 5.7 percent in the West.

The Consumer Price Index showed that overall prices are up 4 percent over the past 12 months while core inflation, which excludes energy and food, has risen by 2.4 percent in the past year, including a 0.2 percent March increase. Clothing costs fell by 1.3 percent, the biggest drop in nearly a decade.

In another reflection of the squeeze on ordinary Americans, the Labor Department said that average weekly earnings for nonsupervisory workers dropped by 1 percent last month, compared with a year ago, the sixth straight month that inflation-adjusted wages have fallen.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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