By Shobhana Chandra
Dec. 14 (Bloomberg) -- U.S. consumer prices rose the most in more than two years last month on record energy costs, reinforcing the Federal Reserve's concern that inflation will erode confidence in the economy.
The consumer price index increased 0.8 percent in November, up from 0.3 percent the previous month, the Labor Department said today in Washington. Prices excluding food and energy climbed 0.3 percent, also more than economists anticipated. Another report from the Fed showed industrial production expanded, after declining in October.
The inflation figures may explain the Fed's decision to lower its benchmark interest rate by a quarter point this week, disappointing some investors who said the cut wasn't deep enough to combat the economic slowdown. Some traders trimmed bets on a reduction in January, though most still see another cut in borrowing costs.
``There is no question inflation is going to remain a concern for policy makers,'' said David Resler, chief economist at Nomura Securities International Inc. in New York, who correctly forecast the increase in so-called core prices. ``This certainly will give some policy makers pause about the advisability and desirability of further rate cuts.''
Economists surveyed by Bloomberg News forecast consumer prices would rise 0.6 percent, according to the median of 80 estimates. Predictions ranged from gains of 0.4 percent to 1 percent. Prices excluding food and energy were forecast to rise 0.2 percent.
Treasuries initially dropped after the report, sending 10- year note yields to the highest in a month, then recouped some of the losses. Ten-year yields rose to 4.23 percent at 4:27 p.m. in New York, from 4.20 percent late yesterday. The dollar extended its rally, while stocks fell.
Consumer prices increased 4.3 percent in the 12 months to November, the most since June 2006. The monthly gain, which reflected a surge in gasoline prices, was the biggest since September 2005.
The core rate increased 2.3 percent in the 12 months to November, up from a 2.2 percent October year-over-year gain.
As inflation has picked up in the last year, gold and crude oil have rallied. The dollar is down 19 percent since 2001 against a trade-weighted basket of the U.S.'s biggest trading partners.
`Reluctant' to Cut
``It puts the Fed between a rock and a hard place,'' Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``They say they are worried about inflation, but that doesn't stop them from cutting rates. They are reacting to stress in capital markets and any weakening in the economy, but only in a reluctant fashion.''
Traders pared their expectations of a quarter-point Fed rate cut at the next meeting, on Jan. 29-30, according to futures prices on the Chicago Board of Trade. Odds of a reduction to 4 percent slipped to 78 percent, from 96 percent yesterday.
Prices are rising even as economic growth is slowing after a third-quarter spurt. Gross domestic product will expand at an annual rate of 1 percent this quarter, according to the median estimate in a Bloomberg survey of economists this month.
There may ``easily'' be a recession next year, Harvard University economist Martin Feldstein, head of the group responsible for dating U.S. economic cycles, said in an interview today. He put the odds at ``about 50 percent,'' and said the risk ``clearly has been increasing.''
Black & Decker Corp., the largest U.S. power-tool maker, today lowered its quarterly and annual profit forecasts because of costs tied to a recall and a slowdown in U.S. consumer spending.
U.S. industrial production increased 0.3 percent in November, exceeding the median forecast of 0.2 percent, after a 0.7 percent drop that was bigger than previously estimated, Fed figures showed today.
Inflation also accelerated in Europe. Prices in the 13- nation area rose 3.1 percent in November from the same month last year, the most since May 2001 as food prices soared.
The U.S. consumer-price report showed energy prices jumped 5.7 percent, after a 1.4 percent increase in the prior month. Gasoline prices climbed 9.3 percent and fuel oil costs jumped 14.2 percent, the most since February 2003.
Crude oil prices on the New York Mercantile Exchange averaged $94.63 a barrel last month compared with $85.66 in October. The cost reached a record $99.29 a barrel on Nov. 21. Regular gasoline at the pump exceeded $3 a gallon for most of November, according to the American Automobile Association.
U.S. carriers boosted ticket prices seven times since Sept. 1 to combat rising jet-fuel prices. The latest attempt was rolled back Dec. 3 after Continental Airlines Inc. decided against an increase, suggesting a slowing economy may rein in prices in coming months.
High oil prices are ``one of the top challenges facing the industry today,'' Tom Horton, chief financial officer of AMR Corp., parent of American Airlines, said last week at a conference.
Others are making increases stick. Kroger Co., the biggest U.S. grocery chain, this week said it charged shoppers more to recoup higher costs for cereal and cheese, helping boost third- quarter profit by 18 percent.
The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.
Apparel, prescription drugs, hospital services and airfares led the increase in the cost of living last month.
The 0.8 increase in clothing prices was the biggest since 1999 and may reflect the inflationary impact of a weaker dollar on imported goods, economists said. Most apparel sold in the U.S. is now made overseas.
Food prices, which account for about a fifth of the CPI, increased 0.3 percent for a second month.
Rents, which make up almost 40 percent of the core CPI, also rose. A category designed to track rental prices for owner- occupied homes rose 0.3 percent, compared with a 0.2 percent increase the month before.
Slowing growth will help damp price pressures, economists said. The Fed's preferred gauge of inflation, which is tied to consumer spending and excludes food and energy costs, will rise 1.8 percent in 2008 after a 1.9 percent gain this year, according to the median estimate of economists surveyed by Bloomberg this month. The measure would be within the range forecast by policy makers.
Economic growth will slow to a 1 percent pace this quarter, a fifth the rate of the previous three months, the Bloomberg monthly survey said. Economists also trimmed estimates for the first quarter of 2008 to 1.5 percent.
Other price reports also reflected surging fuel bills. Wholesale prices rose 3.2 percent in November, the biggest jump in 34 years, the Labor Department reported yesterday. The increase was driven by a record one-month gain in energy costs. Excluding food and fuel, producer prices rose 0.4 percent.
The two reports reflect differences in timing. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.