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Sun, Feb 18, 2001 EST
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Inflation Raises Its Ugly Head
Despite Slowing Economy

   Fox Market Wire
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Wholesale inflation posted its biggest jump in a decade, rising 1.1 percent in January — nearly a fourfold increase over the 0.3 percent rise many analysts projected.

Markets remained in negative territory as investors digested the surprising news. But treasury bond prices recovered after tanking Friday morning.

The Producer Price Index, which measures inflation pressures before they reach store shelves, followed a mild 0.2 percent increase in December, the Labor Department reported Friday.

Inside The Numbers

The leap was led by record price increases for natural gas used in homes, for powering electric utilities and in industrial production. However, price increases for other goods were widespread.

The PPI report also showed that prices for goods other than food and energy products — which can swing widely from month to month — rose a sharper-than-expected 0.7 percent in January, following a slim 0.1 percent rise the month before. Analysts were forecasting a 0.1 percent rise in this "core" rate of inflation.

The 0.7 percent reading in the core rate was the highest since a 1.0 percent rise in December 1998. Meanwhile, The 1.1 percent rise in wholesale prices was the largest since a 1.3 percent increase registered in September 1990.

In January, energy prices rose 3.8 percent, the biggest increase since a 6.1 percent spike in June. This trend of rising energy costs reflects production limits and strong demand.

The Federal Reserve slashed interest rates by a full percentage point in January, in an effort to prevent the weakening economy from slipping into a recession. One of the reasons Fed policy-makers cited for being able to act so aggressively was that inflation — outside the burst in energy prices — had remained in check.

Economy Continues its Slowdown

In another report, the Federal Reserve said output at the nation's factories, mines and utilities dropped by 0.3 percent in January, further evidence of the economic slowdown. Many analysts had expected a stronger showing, following the steep 0.5 percent decline posted in December.

January's performance was led by a sharp, 6 percent decline in output at gas and electric utilities, reflecting moderating temperatures after December's extreme cold.

Operating capacity, meanwhile, fell to 80.2 percent in January, the lowest since August 1992, as companies cut back in response to slackened demand.

One area of the economy that has held up well during the sharp economic slowdown has been the housing sector. That strength was evidenced in another report Friday from the Commerce Department showing that new housing construction rose by 5.3 percent in January to a seasonally adjusted annual rate of 1.65 million units.

The Associated Press contributed to this report

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