New headache: Big rise in CPI

WASHINGTON - Among the many things to be thankful for this holiday season is that you are not Federal Reserve Chairman Ben S. Bernanke.

He is besieged by turmoil in the credit markets, Wall Street clamoring for more interest-rate cuts, and inflation data this week that may tie his hands as he tries to keep an economic slowdown from snowballing into recession.

The Bureau of Labor Statistics reported yesterday that its Consumer Price Index - the measure of inflation at the retail level - jumped 0.8 percent in November from October, the largest one-month increase since the aftermath of Hurricane Katrina.

That bumped the inflation rate to 4.3 percent for the last 12 months.

Energy prices are up 21.4 percent over the last 12 months; food prices rose 4.8 percent in the same period.

For November, consumers saw a 9.3 percent markup at the gas pump after a 1.4 percent increase in October. Food costs held steady, but the price of clothing rose.

When volatile energy and food prices are stripped out, core inflation rose 0.3 percent to a 2.3 percent annual rate. That is still above the Fed's perceived comfort zone of 2 percent, and it emphasizes a similar picture from Thursday's data on wholesale inflation.

It creates a dilemma. The economy is expected to slow early next year, and usually the Fed's response would be to lower interest rates. That prompts consumers to buy homes and cars, and businesses to buy equipment and build plants, mostly with borrowed money.

But that fuels inflation, which is defined as a rise in prices across the economy.

"What you perceive is the Fed's job is becoming very difficult moving into 2008," said Kenneth Beauchemin, an economist with Global Insight in Lexington, Mass.

Wall Street criticized the Fed on Tuesday for not cutting interest rates more aggressively. Its quarter-point rate cuts that day disappointed investors, who promptly dumped stocks, pushing the Dow Jones industrial average down nearly 300 points.

"The Fed chose not to de-emphasize the inflation risk for a very good reason," Beauchemin said. "It has been monitoring what could be acceleration in the trend core rate."