Inflation up: Fed Ready to Pivot on interest rates

The cost of food and fuel soared in May and that pushed the cost of living up 0.6% - about what analysts had expected:

The Labor Department reported Friday that consumer prices rose by 0.6 percent last month, the biggest one-month increase since last November, as gasoline costs surged by 5.7 percent. Food prices, which have also been rising sharply, were up 0.3 percent as the cost of beef and bakery products showed big gains.

Core inflation, however, which excludes energy and food, edged up a more moderate 0.2 percent in May. That increase was right in line with expectations and should help relieve worries that the big increases in food and energy could be breaking through to more widespread inflation.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the moderate gain in core prices showed price pressures are remaining contained despite fears at the Federal Reserve.

The Fed, which from September through April was aggressively cutting interest rates to fight a mounting economic slowdown, is now indicating that its biggest concern has changed from the threat of a recession to worries about inflation.

In a speech Monday, Fed Chairman Ben Bernanke said that the Fed will "strongly resist an erosion of longer-term inflation expectations." Those comments have raised expectations that the Fed's next move later this year will be to start raising interest rates.

Any Fed action on raising rates would not be seen as necessarily a bad thing. Rates are so low that a move to increase them would be welcome news to investors who are worried about the long term effects of these sky high energy prices.

One other bit of troubling news was the drop in earnings of the American worker. The big jump in inflation along with weak increases in wages means the American worker's income fell behind the cost of living 1.2%. This, after some strong gains in wages early in the year, could mean that once again, the job market is weakening and unemployment could be on the rise.

The price of gas now stands at a record $4.06 across the nation.
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