WASHINGTON – Worse-than-expected inflation data sent stocks skidding Wednesday amid fears that soaring energy and housing costs may prompt the Federal Reserve to continue raising interest rates.

The Dow Jones Industrial Average fell 214.28 points to close at 11,205.61 after the Labor Department reported that the Consumer Price Index rose 0.6 percent in April. The spike was fueled primarily by an 8.8 percent increase in gasoline prices. The CPI rose at a 4.1 percent annual rate over the past three months, higher than the Federal Reserve’s tolerance range of 2 to 3 percent.

What really troubled Wall Street was April’s 0.3 percent jump in core inflation, which strips out volatile energy and food prices. That’s the same high number registered in March, and put it, too, at the upper limit of the Federal Reserve’s comfort zone for inflation for the second consecutive month.

“When combined with recent economic reports suggesting that first-quarter GDP growth will be revised up to well over a 5 percent pace, there is a much stronger case for some additional rate hikes by the Federal Reserve later this summer,” Mark Vitner, senior economist for Wachovia Corp., a Charlotte, N.C.-based national bank, wrote in an analysis.

The rise in core inflation is attributed in part to companies passing on the increase in commodities prices to consumers, and significantly, to rising housing costs. The Bureau of Labor Statistics measures housing costs as “equivalent rent,” and put its growth rate at 0.4 percent for the second straight month.

Clothing prices jumped 0.6 percent, while prices for core services such as medical care and entertainment rose 0.3 percent for a third straight month.

It all adds up to pressure on the Fed to keep raising interest rates. Its mission is to control inflation – the increase in prices across the economy – and its main tool is the federal funds rate – the rate banks charge each other for overnight loans – which serves as a benchmark for commercial bank lending rates to consumers and businesses alike.

On May 10, the Fed’s Open Market Committee raised the funds rates to 5 percent, the highest level in five years and the 16th consecutive increase since June 2004. Many hoped that the Fed wouldn’t raise it again at the next meeting, June 28-29.

But Wednesday’s numbers make another quarter-point increase seem probable.

“The report shows that core inflation is on a firm upswing and helps the case for a June tightening from the Fed,” the U.S. Economic Research division of Barclay’s Capital wrote Wednesday in a note for investors.

For many Americans, the inflation data confirm what they’re feeling in the wallet: A dollar isn’t stretching as far. From April 2005 to April 2006, inflation ran at an annualized rate of 3.5 percent.

, while core inflation was at 2.3 percent. Energy-price inflation during that period was 17.8 percent.


Economists will watch the Core Personal Expenditure Index, which is released later this month, even more closely. It’s believed to be the Fed’s favored inflation gauge, and in recent months it’s closely tracked CPI data.

If that index comes in at the same 0.3 percent as Wednesday’s core CPI number, “it’s going to raise a lot of eyebrows,” said Kenneth Beauchemin, the chief U.S. economist for Global Insight, an economic consultancy in Lexington, Mass.

That could lead to even more Fed increases.

“The wild fluctuations in energy prices are introducing a lot of noise into the price data, and it takes time to see through the noise and pick up the signals,” Beauchemin said. “That’s the message the Fed has been trying to get across.”

(c) 2006, Knight Ridder/Tribune Information Services.


GRAPHIC (from KRT Graphics, 202-383-6064): ECONOMY

AP-NY-05-17-06 1716EDT