Industrial production rises, but so do inflation, oil prices

Posted 3:34PM on Tuesday 16th April 2002 ( 23 years ago )

WASHINGTON - The economy chugged ahead on the comeback trail with production by U.S. industry posting the biggest gain in nearly two years. But inflation crept higher, reflecting a worrisome spurt in oil prices, a potential pothole for the recovery. The Federal Reserve reported Tuesday that output at the nation's factories, mines and utilities jumped 0.7 percent in March, after a solid 0.3 percent gain -- a sign that the turnaround in the manufacturing sector is gaining momentum. It marked the third straight monthly increase. That's good news for the national economy and for America's manufacturers, which saw hundreds of thousands of jobs evaporate during the recession. Though the budding economic revival isn't causing a run-up in consumer prices, soaring oil costs are a concern. A dramatic increase could slow or derail the recovery. "Oil prices. That's the great wild card," said David Seiders, chief economist for the National Association of Home Builders. The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose 0.3 percent in March, following a 0.2 percent advance. Virtually all of the pickup came from energy prices, which shot up 3.8 percent, the biggest increase in 10 months. Tensions in the Middle East were a key force behind the increase. Oil prices retreated last week, only to flare again this week, stoked by uncertainties in Venezuela, the world's fourth-largest oil exporter. President Bush, who wants to take credit for steering the country out of its first recession in a decade, is keeping close tabs on the situation. While many economists are hopeful energy prices will moderate, they acknowledge that soaring energy costs are a potential Achilles heel for the economic recovery. Economists said the odds are growing that the Federal Reserve may leave short-term interest rates -- now at 40-year lows-- unchanged into the summer. "In general, higher oil prices are a bad thing for the economy. They represent a very real cost to the U.S. that feeds through the whole economy," said Bill Cheney, chief economist at John Hancock. Out-of-control energy prices would cause consumers to lose confidence and retrench, snuff out a manufacturing comeback and send corporate profits tumbling. Gasoline prices went up 8 percent in March, the largest advance in six months, reflecting higher oil costs and stronger demand. Fuel oil prices rose 2.2 percent, the biggest increase since December 2000, and natural gas prices increased 0.8 percent. Food prices rose 0.2 percent for the second month in a row. But excluding volatile energy and food prices, the "core" rate of inflation moderated, rising just 0.1 percent last month, down from a 0.3 percent increase. That suggested most other prices were remaining well-controlled. Prices for new cars and trucks, computers and telephone charges actually fell, providing shoppers with some bargains. Competitive factors, cheaply priced imports and signs that consumers who kept buying throughout the recession don't have a lot of pent-up demand coming out of it are restraining price increases for some goods, economists said. But prices for medical care continued to go up, rising 0.4 percent in March. Clothing prices rose 1.2 percent, the largest since August 1998, reflecting the introduction of higher priced spring and summer clothes. But economists predict apparel prices will moderate as seasonal items are discounted. In the Fed's report, the 0.7 percent increase in industrial output matched the rise registered in May 2000 -- before the battered industry fell into a long slump. For the first quarter, industrial activity rose at a rate of 2.5 percent, a big improvement over the 6.7 percent rate of decline in the final three months of last year. At factories, production rose 0.8 percent in March, the strongest showing in two years. As the manufacturers pick up steam, the home-building sector, which propped up the economy during the slump, is losing some. Housing construction fell 7.8 percent in March, the largest decline in two years, the Commerce Department said. Even with the drop, builders began work on 1.65 million units, at an annual rate, a still-robust level. Economists predict a slowdown but still foresee healthy activity. Said Ken Mayland, president of ClearView Economics: "Don't get the wrong idea: Housing is not weak or faltering." ---- On the Net: CPI: http://www.bls.gov/ Industrial output: http://www.federalreserve.gov/ Housing: http://home.doc.gov/

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