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Consumer Prices in U.S. Climb More Than Forecast: Roger

Bootle’s Epic Book, Finally ready for a new title:

The Rebirth of Inflation

T
he cost of living in the U.S. climbed more than forecast in January, led by higher prices for food and fuel that

may be starting to filter through to other goods and services.

The consumer-price index increased 0.4 percent for a second month, exceeding the 0.3 percent median

estimate of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington.

The so-called core rate, which excludes volatile food and fuel costs, rose 0.2 percent, the biggest gain since October 2009.

Growing economies in Asia and Latin America are boosting global demand for oil and other commodities, raising costs

for American factories. Accelerating growth is prompting some companies to carry out beginning-of-year price increases

even as consumers remain constrained by unemployment at 9 percent.

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“You’re going to see more companies that attempt to pass through” higher costs, said Tom Porcelli, chief U.S. economist

at RBC Capital Markets Corp. in New York, who correctly forecast the gain in core prices. “How successful they are

depends on the economic backdrop. We’re looking at a slightly firmer inflation backdrop.”

The projected gain in consumer prices was based on the median of 79 economists in a Bloomberg survey. Estimates

ranged from increases of 0.2 percent to 0.5 percent.

More Claims

Another Labor Department report showed more Americans than projected filed first-time claims for unemployment

insurance last week, a sign the improvement in the labor market will take time to develop.

Applications for jobless benefits increased by 25,000 to 410,000 in the week ended Feb. 12, exceeding the 400,000

median forecast of economists surveyed by Bloomberg. The total number of people receiving unemployment insurance

was little changed, while those collecting extended payments decreased.

Stock-index futures dropped after the reports. The contract on the Standard & Poor’s 500 Index maturing in March fell

0.2 percent to 1,330.2 at 8:48 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year

note down to 3.57 percent from 3.62 percent late yesterday.

Federal Reserve policy makers took a more optimistic view of the U.S. economy last month while maintaining their

dissatisfaction with job growth as they pressed forward with an expansion of record monetary stimulus, minutes of last

month’s policy meeting released yesterday showed.

Fed View

Even with soaring commodity costs, the Fed remains concerned that consumer inflation is below its long-range annual

target of 1.6 percent to 2 percent.

“Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer-run

inflation expectations were stable,” the minutes said.

Energy costs increased 2.1 percent in January from a month earlier, and rose 7.3 percent for the prior 12 months, today’s

report showed. Food prices rose 0.5 percent last month, the biggest gain since September 2008, and were up 1.8 percent

for the 12-month period.

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Core inflation was boosted by a 1 percent increase in the cost of clothing, the most since February 2009, and a 2.2

percent rise in airline fares.

Rents Climb

The report showed rents, which make up almost 40 percent of the core rate climbed at the same pace as in prior months.

Owners-equivalent rent, one of the categories designed to track rental prices, increased 0.1 percent in January. Mounting

foreclosures are reducing homeownership, may drive up demand for rental housing.

The cost of medical care increased 0.1 percent, restrained by a 0.1 percent drop in medical services that was the biggest

since November 1975.

An unemployment rate that’s held at or above 9 percent since May 2009 is also restraining labor costs. The threat of

deflation, or a prolonged decline in prices that’s harmful to the economy, prompted Fed policy makers November 3 to

announce the central bank’s purchase of $600 billion in additional Treasury securities by the end of June.

Illinois Tool Works Inc., a Glenview, Illinois-based diversified manufacturer of engineered products and specialty

systems, is one company that has been able to pass on higher costs to customers.

“Costs have continued to rise, even in the first quarter, for things like steel,” Ronald D. Kropp, chief financial officer, said

in a conference call on Jan. 31. “We have put price increases in place. Our goal is to recover not just the cost, but also the

margin.”

No Pass-Through

Chipotle Mexican Grill Inc., which owns and operates quick- serve Mexican restaurants across the U.S., is seeing its costs

for beef, cheese, tomatoes and green peppers rise. Still, the company has been reluctant to raise prices.

“Commodity inflation has continued to push our food costs higher in 2011 already, and we expect continued inflationary

pressure on many of our ingredients,” said John R. Hartung, chief financial officer at Denver-based Chipotle in a Feb. 10

earnings teleconference. “We plan to hold off on any menu- pricing decisions until later in the year, which will allow us to

see how inflation plays out on a sustained basis.”

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The CPI is the broadest of three monthly price gauges from the Labor Department, because it includes goods and

services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline

fares and movie tickets. Ask us how to invest and prepare, protecting wealth during this inflationary period.

Shawn A. Mesaros, Pacific Asset Management

Pacific Asset Management Direct (206) 933-1600 Toll Free (877) 637-2767 Fax (206) 600-3175