Washington: February 20, 2008 – As per govt. report released on Wednesday, the inflation rose more than expected last month, adding to worries about the economy and sending a reminder to central bankers that rising prices remain a threat.

The housing crisis also continued to take a toll on residential home construction. Groundbreakings for homes rose slightly but remained near their lowest levels since the early 1990s, and permits for new home projects fell again.

The inflation report raised concerns among some investors that the Federal Reserve will back away from cutting interest rates again at its next meeting, on March 18, and stocks declined at the opening bell.

Lower interest rates help stimulate growth but can cause prices to rise. Still, Fed officials have signaled they are more concerned about staving off a recession than tempering price pressures.

The inflation report “should not provide too much of a headache for the Federal Reserve, which seems to be largely indifferent to near-term inflation movements at the moment,” wrote economists at ING Bank.

The Consumer Price Index rose 0.4 percent in January, a bigger gain than economists had predicted. Over the last 12 months, the index has surged by 4.3 percent, one of the highest year-over-year rates in decades, the Labor Department said.

The rise was led by increases in the costs of food, gasoline, shelter, and transportation. The so-called core inflation rate, which excludes food and gasoline prices, ticked up 0.3 percent last month.

The core rate is 2.5 percent above its level in January 2007, above the Fed’s recognized comfort zone ceiling of 2 percent.
 
Economists predict that inflation will taper off by the second half of this year. The economic downturn is expected to reduce consumer demand, which in turns tends to keep prices down.

Oil, however, closed above $100 a barrel on Tuesday for the first time, meaning consumers will still face pocketbook pressures from the price of gasoline.

Consumer spending is also affected by the housing crisis, which shows no sign of abating. Builders are rushing to reduce inventories in the face of dropping demand, as potential buyers stay on the sidelines in the hope that prices will continue to drop.

Groundbreakings for new homes edged up 0.8 percent in January, to a 1.012 million annual rate. But the increase comes after a 14 percent plunge in December that sent housing starts to their lowest level in more than 16 years. And construction of new single-family homes dropped again last month.

In India and many other stock exchanges, the present trend of inflation and policy of Federal Reserve may affect the stock market.

Full