US consumer prices logged an unexpectedly sharp rise in March as the cost of energy, clothing and lodging jumped, according to a government report published today.
The latest figures suggest long-dormant inflation may be rearing its head and will add to growing concerns that a long period of historically low interest rates could be drawing to a close.
A separate report showed the US trade gap narrowed in February as the weak dollar and stronger economic growth propelled both exports and imports to record levels.
The consumer price index, the most widely used gauge of US inflation, rose 0.5 per cent in March after a 0.3 per cent increase in February.
The closely watched core CPI, which strips out often-volatile food and energy costs, surged 0.4 per cent, the biggest increase in nearly 2-1/2 years.
Economists on Wall Street had looked for a 0.3 per cent rise in the CPI, with core prices up just 0.2 per cent.
Expectations that the Federal Reserve could raise interest rates from 1958 lows sooner than had been thought pushed Treasury bond yields to their highest level this year and boosted the dollar.
"It looks as though core inflation is back," said Mr John Lonski, chief economist at Moody's Investors Service in New York. "We have the core CPI now growing at an average monthly rate of roughly 0.3 percent thus far in 2004. That adds up to a rate hike happening sooner rather than later."
Mounting signs of economic strength had already prompted many on Wall Street to push forward expectations of when the Fed could bump up rates and some economists said the inflation reading meant the central bank could move as soon as June.
The Fed has held overnight rates at 1 per cent since June last year and has vowed to exercise patience in determining when to raise them.
Over the past 12 months, core prices have risen 1.6 per cent, the biggest 12-month gain since the period ending last May and a sharp pick-up from the tame 1.2 percent increase posted through February.
The underlying inflation rate has now moved up for two straight months after apparently hitting bottom at a 38-year low of 1.1 per cent.