Strategy

Core Inflation Hits 13-month High

Fastest increase since March 2005 suggests that the Fed may raise short-term interest rates once again when it convenes in June.
Stephen TaubMay 26, 2006

Is inflation actually higher than the pundits have maintained?

The latest worrisome data, for corporations and other economy-watchers, was Friday’s announcement by the Department of Commerce that core inflation rose 2.1 percent in April, compared with April 2005.

This was the fastest increase in core inflation — which excludes the volatile food and energy sectors — since a 2.1 percent increase in March 2005, reported the Associated Press. Higher inflation generally spawns higher interest rates, of course, which in turn increase the cost of capital for most companies.

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More important, noted the AP, is that this rate exceeds the Federal Reserve’s “comfort zone” for inflation, which ranges from 1 percent to 2 percent. Although the Fed has raised short-term interest rates 16 times during the past two years, it might do so again in June if it perceives continued inflationary pressures.

The wire service also noted the concerns of some observers that rising oil prices, which don’t figure into core inflation, will start showing in higher prices for other goods and services that are included.