msnbc.com news services
updated 5/13/2011 11:00:56 AM ET 2011-05-13T15:00:56

U.S. inflation hit the highest level in 2-1/2 years as food and energy prices moved higher, but there was little sign of a broader pick-up in inflation that would trouble the Federal Reserve.

The Labor Department said Friday its Consumer Price index increased 0.4 percent in April from March after rising 0.5 percent in March.

The rise, which was in line with economists' expectations, took the year-on-year inflation reading to 3.2 percent, the highest since October 2008.

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The core CPI, which strips out volatile food and energy costs, rose a mild 0.2 percent from March, and the 12-month increase, at 1.3 percent, was at its highest level since February 2010.

The Federal Reserve, however, would like to see that move closer to 2 percent over time.

"This is not enough to prompt an immediate response from the Federal Reserve but they're certainly watching this," said Dana Saporta, an economist at Credit Suisse in New York.

A separate economic report Friday — the Thomson Reuters/University of Michigan preliminary consumer sentiment index — showed U.S. consumer sentiment rose more than expected in the early part of May.

The stiff gains in food and energy costs in recent months have squeezed consumers, who are enjoying only tepid wage gains.

The Labor Department said that when adjusted for inflation, average weekly earnings fell 0.3 percent in April after declining 0.4 percent in March.

U.S. government debt prices and stock index futures edged higher on the data.

Fed officials believe high commodity prices, which undercut economic growth in the first quarter, will not have a lasting effect on inflation, but will likely be watching the steady increase in core prices closely.

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Some economists believe a sharp retreat in commodity prices in recent days signals that inflation could soon peak.

"With crude oil prices falling 10 percent in the past week and cereal prices in retreat for more than a month now, energy and food should eventually start to have a deflationary impact," said Paul Ashworth, chief U.S. Economist at Capital Economics in Toronto.

Gasoline prices accounted for almost half of the rise in overall consumer inflation last month, advancing 3.3 percent.

The pace of increase, however, slowed from March's 5.6 percent rise and further declines are likely after U.S. gasoline futures registered their sharpest daily drop since September 2008 on Wednesday and slipped further on Thursday.

Last month, food prices rose 0.4 percent after increasing 0.8 percent in March.

Rising costs for housing, new vehicles, used trucks and medical costs bumped up core inflation last month. Shelter costs, which account for about 40 percent of core CPI, rose 0.1 percent, rising by the same margin for a seventh straight month.

Prices for new vehicles rose 0.7 percent last month, likely reflecting tight inventories as a shortage of parts in the wake of the devastating earthquake and tsunami in Japan disrupts production. They increased by a similar margin in March.

Apparel prices rebounded 0.2 percent from a 0.5 percent fall in March.

The Associated Press and Reuters contributed to this report.

Video: Inflation at a two year high?

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