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By MARTIN CRUTSINGER, The Associated Press

Published: February 21, 2008

WASHINGTON - Consumers paid more to fill up their gas tanks, buy groceries and go to the hospital in January as prices on a wide range of items pushed higher.

Inflation was increasing even as the economy was slowing dramatically, a development certain to raise concerns at the Federal Reserve, which has been cutting interest rates aggressively in the belief that fighting off a threatened recession was more important than worrying about inflation pressures.

The Labor Department reported that its closely watched Consumer Price Index posted a gain of 0.4 percent last month, matching December's increase and higher than the 0.3 percent rise that analysts had expected. Food costs jumped by the largest amount in 11 months, led by big gains for vegetables, fruit, poultry and pork.

Core inflation, which excludes food and energy, rose by 0.3 percent, the biggest jump in this measure in seven months. That increase reflected higher prices for medical care, education, clothing, tobacco and airline fares.

"The economy may be faltering, but that has not stopped firms from raising prices," said Joel Naroff, chief economist at Holland, Pa.-based Naroff Economic Advisers. "It didn't matter whether you went to the supermarket or ate out, costs were up."
Recession Fears Are Growing

With the latest increase, core prices have risen over the past 12 months by 2.5 percent, the biggest jump in 10 months and far above the Fed's comfort zone of 1 percent to 2 percent gains in the underlying inflation rate. The increase in inflation pressures is coming at a time when economic growth has slowed sharply, raising concerns that the country might be in danger of falling into a recession.

The Fed last month began an aggressive campaign to cut interest rates, lowering a key rate by the largest amount in a single month in more than a quarter-century. Analysts said they think the Fed will see the threat of a recession as a bigger risk at the moment than the rise in inflation. However, some predicted the Fed might trim rates by a smaller quarter-point cut at the March 18 meeting rather than the half-point move that markets are expecting.

A second report Wednesday showed that the housing sector remains in a steep downturn. Construction of new homes and apartments edged up by a slight 0.8 percent in December to an annual rate of 1.012 million units. All of the strength came from a rebound in apartment construction, which had plunged in December. The larger single-family sector fell by 5.2 percent last month.

Applications for building permits fell 3 percent to an annual rate of 1.048 million units, the lowest level since November 1991.

"Clearly the housing recession continues with no end in sight," said Bernard Baumohl, managing director of the Economic Outlook Group, a Princeton Junction, N.J., private forecasting firm.

Housing Slump Drags Down Economy

The prolonged decline in housing, with falling sales and weak prices, has been a major drag on the overall economy. Growth skidded to a near standstill in the final three months of last year, rising at an annual rate of just 0.6 percent.

Some economists think growth in this quarter and the next will turn negative, fulfilling the classic definition of a recession. To combat the weak economy, Congress passed a $168 billion economic stimulus package to provide tax rebates to millions of families in the spring.

The Fed slashed its own forecast for economic growth in a new projection released Wednesday but still had no recession in its outlook. The updated forecast projected the overall economy will grow between 1.3 percent and 2 percent this year, down from October's forecast when the Fed predicted the economy would grow by a stronger 1.8 percent to 2.5 percent this year.

Meanwhile, The Labor Department said that average weekly earnings for nonsupervisory employees fell by 1.4 percent in January, compared with a year ago. It was the fourth consecutive monthly decline, when compared with a year ago, and further evidence that wage gains are failing to keep up with inflation.

For all of 2007, consumer inflation rose by 4.1 percent, the biggest increase in 17 years, as the costs of both food and energy accelerated sharply. Economists said they still think that food and energy will moderate this year as the weak economy dampens price pressures, but they conceded events could derail those expectations, noting the jump this week in oil prices to a record close Tuesday above $100 a barrel.

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