Signs that consumer prices are rising even as the U.S. economyslows may delay additional moves by Federal Reserve Chairman Ben S.Bernanke to spur growth.

The Fed chairman, who is scheduled to speak at a Jackson Hole,Wyoming, conference on Aug. 26, used the annual gathering ofeconomists last year to hint at a second round of so-calledquantitative easing, in which the Fed purchased $600 billion ofTreasuries from November 2010 to June.

Investors, such as Barton Biggs, managing partner and co-founder of Traxis Partners LP, have called for the Fed to embark ona new round of asset purchases. Yesterday's announcement that theconsumer price index rose 0.5 percent from June, more than twicethe 0.2 percent median forecast of economists surveyed by BloombergNews, may embolden Fed policy makers who oppose further suchmeasures.

“It's hard to say we have stagflation, but we do have inflationtoo high for the Fed to do QE3,” said Marc Chandler, global head ofcurrency strategy for Brown Brothers Harriman & Co. in NewYork.

The economy's need for additional help was underscored by thePhiladelphia Fed's general economic index dropping to minus 30.7this month, the lowest since March 2009, when the economy was in arecession.

Told Congress
Bernanke on July 13 toldCongress the Fed is prepared to take additional action, includingbuying more government bonds, if the economy appeared in danger ofstalling or if deflation pressures emerged. The Fed on Aug. 9cracked the door wider to such action when it offered a much moredownbeat assessment of the economy. That same day, the Fed pledgedto hold a key interest rate at a record low near zero throughmid-2013 to help bolster the recovery.

Rising inflation may intensify debate among policy makers afterthree regional Fed bank presidents voted against last week'sdecision, the most dissent in almost 19 years. The dissenters werePhiladelphia Fed President Charles Plosser, Dallas Fed chiefRichard Fisher and Narayana Kocherlakota of Minneapolis.

Paul Dales, senior U.S. economist at Capital Economics Ltd. inToronto, said the inflation picture will likely stay the Fed'shand. The core CPI was 0.9 percent on the eve of the Jackson Holemeeting last year and was expected to decline, Dales said. Now, itstands at an annualized 1.8 percent and may continue rising, headded.

“We probably won't get any more significant policy stimulus thisyear, but early next year once it becomes clear that core inflationbegins to fall back, then QE3 could well be on the table again,” hesaid.

Recession Fears
Fears of a new recessionmay prove overstated. Chandler said he expects the economy to growat a faster rate in the current quarter than it did in the previousthree months, when it rose at an annual rate of 1.3 percent.

New York Fed President William Dudley said in a speech inNewark, New Jersey, the risk of a renewed recession remains “quitelow.” And Biggs told Bloomberg Television: “We're in a stagnant butnot collapsing economy.”

Another report showed fewer Americans on average filed claimsfor unemployment benefits over the past month, indicating the jobmarket is holding up for now.

Reports yesterday also showed the residential real-estate marketcontinues to stagnate and consumers' economic expectations plunged.Additionally, the index of leading indicators climbed, boosted byan increase in money supply that may reflect a flight tosafety.

Figures from the Labor Department yesterday showed the averagenumber of workers filing applications for jobless benefits over thepast four weeks dropped to 402,500, the lowest since April 16. Theweekly readings, which tend to be more volatile, showed claimsclimbed by 9,000 to 408,000 in the period ended Aug. 13, thehighest in a month.

'Not Recession Material'
These data are“not recession material,” said Chris Rupkey, chief financialeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd., in New York. Theplunge in stocks in recent weeks “could start to worry businessesenough for them to lay off workers,” Rupkey said. Nonetheless,claims show “this is not happening yet, but we need to watchclosely for the next couple of weeks.”

Consumer prices were pushed higher by rising costs for fuel thathave since retreated, and by an increase in food expenses.

Excluding energy and food costs, which are usually morevolatile, the so-called core gauge rose over the past year to thegreater-than-projected 1.8 percent. It was the biggest 12- monthgain in more than a year.

The Fed's informal target range for longer-term core inflationis 1.7 percent to 2 percent as measured by a Commerce Departmentgauge tied to consumer spending.

Bloomberg News

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