Consumer prices rise more than expected

WASHINGTON – Consumer prices climbed more than expected and across the board in January, suggesting the nation may be in for a new round of inflation, the government said this morning.

Separately, Washington reported that housing construction picked up slightly last month, but the increase was written off to a break in the weather. A measure of future construction fell to its lowest level in 16 years, pointing to no relief for the embattled housing sector.

The combination was just what the nation’s economic policymakers did not want to see. It leaves the Federal Reserve with the tricky business of balancing its fight to derail recession against the danger of sparking a general rise in prices. And it means the nation may be in for a period of “stagflation,” an unpleasant mix of slow growth and high prices.

“The Fed is caught between the proverbial rock and a hard place,” said David Wyss, chief economist with Standard & Poor’s in New York. “If they fight the inflation, they could deepen the recession, and if they fight the recession, they could end up with higher prices.”

Consumer prices rose 0.4% in January, higher than the 0.3% most analysts had been predicting and matching December’s rate, the Labor department said today. Excluding volatile food and energy, so-called “core” inflation rate rose 0.3%, again higher than the 0.2% increase analysts had been expecting and higher than the nine consecutive 0.2% jumps that preceded it. For the year as a whole, prices were up 4.3%.

“The problem with today’s increases is that they were widely distributed among the various expenditure categories,” said Kenneth Beauchemin, an economist with Global Insight, a suburban Boston forecasting firm. “That means that what’s going on is not the unlikely occurrence of a few large individual price increases, but a general price rise,” he said.

Housing construction puttered along at a 1.012 million home rate in January, a pick-up of 0.8% from December, the Commerce department said. But the increase was written off as a fluke because building permits, which indicate future construction, fell by 3% during the month to a 1.048 million unit pace.

Analysts said that leaves the real estate industry in its deepest recession in a quarter-century and means that housing is likely to continue retarding the growth of the economy as a whole for the rest of the year.

The Fed has cut its signal-sending federal funds rate, the interest that banks charge each other for short-term loans, by two and a quarter points to 3% since last September in an effort to stave off recession and loosen up frozen financial markets. Wall Street investors had been hoping for another point or more in rate cuts, which would bring the funds rate down to 2% or less.

But analysts said that today’s inflation figures make steep further cuts less likely. Investors reacted by driving down the major stock indexes. At noon Eastern Time, the Dow Jones industrial average was off 70.26 points, or 0.57%, at 12,266.96. The broader Standard& Poor’s 500 index was down 6.39 points, or .47%, at 1,342.39. The tech-heavy Nasdaq Composite index shed 8.14, or .35%, at 2,298.06.

peter.gosselin@latimes.com