Production rises, but so do inflation, oil prices

WASHINGTON -- The economy chugged ahead on the comeback trail with production by U.S. industry posting the biggest gain in nearly two years. But inflation crept higher, reflecting a worrisome spurt in oil prices, a potential pothole for the recovery.

The Federal Reserve reported Tuesday that output at the nation's factories, mines and utilities jumped 0.7 percent in March, after a solid 0.3 percent gain in February -- a sign that the turnaround in the manufacturing sector is gaining momentum. It marked the third straight monthly increase.

That's good news for the national economy and for America's manufacturers, which saw hundreds of thousands of jobs evaporate during the recession.

Though the budding economic revival isn't causing a run-up in consumer prices, soaring oil costs are a concern. A dramatic increase could slow or derail the recovery.

"Oil prices. That's the great wild card," said David Seiders, chief economist for the National Association of Home Builders.

The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose 0.3 percent in March, following a 0.2 percent advance. Virtually all of the pickup came from energy prices, which shot up 3.8 percent, the biggest increase in 10 months.

Tensions in the Middle East were a key force behind the increase. Oil prices retreated last week, only to flare again this week, stoked by uncertainties in Venezuela, the world's fourth-largest oil exporter.

President Bush, who wants to take credit for steering the country out of its first recession in a decade, is keeping close tabs on the situation.

While many economists are hopeful energy prices will moderate, they acknowledge that soaring energy costs are a potential Achilles heel for the economic recovery.

Economists said the odds are growing that the Federal Reserve may leave short-term interest rates -- now at 40-year lows-- unchanged into the summer.

"In general, higher oil prices are a bad thing for the economy. They represent a very real cost to the U.S. that feeds through the whole economy," said Bill Cheney, chief economist at John Hancock.