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Consumer prices rise atop energy bubble

Consumer prices galloped ahead in January at the fastest pace in four months, especially pinching the wallets of motorists and other energy users.

The latest picture of the nation's pricing climate, released by the Labor Department on Wednesday, reinforced expectations that Federal Reserve chairman Ben Bernanke and his colleagues will boost interest rates in the months ahead to blunt inflation.

The government's most closely watched inflation barometer, the Consumer Price Index, advanced by 0.7 percent, compared with a 0.1 percent dip in December. The seesaw pattern mostly reflects gyrating energy prices.

"Consumers continue to be battered by rising costs," said Joel Naroff, president of Naroff Economic Advisers. "It's tough out there for most households."

Rising inflation is straining families' budgets. A separate report showed that workers' average weekly earnings, adjusted for inflation, dropped by 0.4 percent in January compared with a year ago. For most workers last year, paychecks didn't keep pace with inflation.

While the Bush administration has talked often about the generally good shape of the economy, Democrats have expressed worries about low and middle-income families struggling under the weight of rising prices and living paycheck to paycheck.

The main culprits behind January's higher CPI reading were rising energy and food prices.

Excluding energy and food costs, though, "core" prices rose by a modest 0.2 percent in January after a 0.1 percent increase in December. More expensive clothing and new cars were mostly blamed for the slight pickup in core inflation.

Fed officials are especially interested in the core inflation readings. By excluding energy and food prices, which can swing widely from month to month, the core inflation gauge gives economists a better sense of how other prices are acting. Fed officials don't want to see elevated energy prices feeding into the retail prices of lots of other goods and services, something that would lead to a broader bout of inflation spreading through the economy.

From an economic point of view, core inflation isn't overly worrisome but is "generating some angst within the Fed," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "The risks remain skewed to a mild up-creep in core inflation during the months ahead" and that will keep the Fed on a rate-raising path, she predicted.

Cooper and other economists said the Fed is on track for another rate increase on March 27-28 - Bernanke's first meeting as Fed chief - and probably will bump up rates at the following session in May.

To fend off inflation, the Fed last month- in the last major piece of business for then-chairman Alan Greenspan - boosted a key interest rate to 4.50 percent, the highest in nearly five years.

In the inflation report, January's 0.7 percent jump in consumer prices was the biggest since a 1.2 percent leap in September when the Gulf Coast hurricanes propelled gasoline prices past $3 a gallon and other energy prices skyward.