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Friday, May 14, 1999 Published at 14:48 GMT 15:48 UK

Business: The Economy

Surprise leap in US inflation

Economists had expected a small increase in inflation due to rising oil prices

US inflation shot up in April at the fastest rate since just before the Gulf War.

It tarnishes what had seemed to be almost perfect low inflation climate in the US economy.

The US Labour Department's Consumer Price Index(CPI) rose 0.7% last month after a 0.2% rise in March.

The important core CPI, which strips out volatile food and energy costs, also picked up sharply, rising by 0.4% after a 0.1% increase in March.

[ image: Share prices dropped significantly on the back of the news on inflation]
Share prices dropped significantly on the back of the news on inflation
Some analysts are saying this could be the first sign that inflation is finally creeping back into the US economy, which has been experiencing its best ever period of sustained growth since World War II.

"I did not think we would see this for another month," said Jim Coons, chief economist at Huntington National Bank. "This report might be the shot that brings the (bond) market to realise that underlying inflation is higher than recently reported numbers."

The interest rate on US Treasury 30 year bonds, one of the most closely watched financial figures in the United States, rose to nearly 6%, its highest level for more than a year. It is widely seen as a signal that the markets believe inflation will continue to rise.

The core annual rate of inflation in the US is still low, at 2.2%.

Interest rate setters

The surprising inflation figures come only days before the Federal Reserve policymakers are scheduled to lock horns and decide on the level of US interest rates. They gather on Tuesday.

Henry Willmore, senior economist at Barclays Capital said that the core inflation rate was "a number...the Fed will have to look at very carefully."

Those who are less alarmist about these figures will point to the average rise in US labour costs which is still low.

Before this CPI report few economists were worried about the potential for a rise in interest rates but that could all change.

Rising oil prices had led economists to expect some increase, albeit marginal, in inflation.

But these statistics were something of a bolt out of the blue.

Economists caught out

US economists expected the CPI to rise by 0.4% and the core rate was projected to have increased by 0.2%.

April's gain in the overall CPI was the largest since October 1990, just a few months before the Gulf War when a tightening of oil supplies triggered price rises.

The core index showed its biggest rise since January 1995.

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