WASHINGTON -- Consumer prices - stoked by more expensive energy and food products - registered their largest increase in more than three years last month, a strong sign that inflation is springing back to life.
The Labor Department reported Tuesday that the Consumer Price Index, the government's most closely watch inflation gauge, shot up by 0.6 percent last month, following a 0.2 percent rise in April.
The increase posted in May was slightly larger than the 0.5 percent advance that some economists were expecting and represented the largest gain since January 2001. Energy prices rose by the largest amount since the beginning of this year and food costs had their biggest increase in more than 14 years.
While there's no doubt that higher gasoline and food prices are hitting the pocketbooks and wallets of consumers, the prices of other goods and services were more restrained. The "core" rate of inflation, which excludes volatile energy and food prices, rose by only 0.2 percent in May - matching economists' forecasts. That was down from a 0.3 percent rise in April.
Nonetheless, the latest snapshot of the nation's inflation climate would justify a move by the Federal Reserve to raise interest rates for the first time in four years when it meets later this month, economists said.
"This confirms the expectation that the Fed will tighten policy," said Mark Zandi, chief economist at Economy.com.
Some companies are finding it easier to raise prices now that the economy is strengthening - something they found hard to do during the economic slump.
There's been a swing from "heavy business price discounting to the restoration of a significant degree of pricing power," Federal Reserve Chairman Alan Greenspan told an international monetary conference last week.
Greenspan, in his remarks last week, said Fed policy-makers probably can boost interest rates gradually to head off inflation, but he didn't rule out more aggressive action.
With the economy on a solid growth track and inflation moving higher, economists widely expect the Fed will boost interest rates for the first time in four years at the end of a two-day meeting Jan 29-30. Zandi and many other economists are forecasting a one-quarter percentage point increase. A few are predicting a bolder, half- percentage point move.
For nearly a year, a key short-term interest rate used by the Fed to influence economic activity has been at 1 percent, a 46-year low.
Analysts don't believe inflation currently threatens the recovery, but the upward pressure in that area marks a big change in the pricing climate from a year ago. The Fed then was worried about the prospects of deflation, which is a prolonged and widespread price decline.
For the first five months of this year, consumer prices rose at a seasonally adjusted annual rate of 5.1 percent, far exceeding the 1.9 percent increase for all of last year. Core prices, meanwhile, increased during the same period at a rate of 2.9 percent, also faster than the 1.1 percent advance registered for 2003.
In May, energy prices led the advance in the overall CPI, rising by 4.6 percent, the largest gain since January and a big pickup from the tiny 0.1 percent rise in April. Gasoline prices last month shot up by 8.1 percent, fuel oil prices went up 3.5 percent, natural gas prices increased 1.2 percent and electricity prices rose by 1.1 percent.
High crude oil prices and strong demand were among the factors in higher energy costs.
Food prices in May jumped by 0.9 percent, the biggest increase since January 1990, and up from a 0.2 percent rise in April. Analysts say that more expensive transportation costs due to higher fuel prices is a factor in the increase in food prices.
With gasoline prices recently easing a bit, Zandi is hopeful that energy prices and food prices will settle down in the coming months.
Elsewhere in the report, medical care costs increased by 0.3 percent and college tuition and fees shot up by 0.8 percent in May. Both categories have been sore spots for consumers.
In other economic news, business inventories rose by 0.5 percent in April as sales dipped by 0.1 percent, the Commerce Department reported.