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Inflation Heating Up, Fed Should Raise Interest Rates Soon

NEW YORK (TheStreet) -- To head off a tough bout with stagflation, slow growth and high inflation, the Federal Reserve should start raising interest rates soon.

Most economists expected 2014 to be a breakout year. A surge in new home construction was expected to instigate growth and jobs creation throughout the economy, even as inflation remained reasonably tame.

So far the reverse appears to be happening.

During the last year, consumer prices have risen 2%, which is nicely within the Fed's target range, but in recent months, food and energy prices have increased sharply.

Sales to China and poor growing conditions are making milk expensive and steak a special occasion luxury rather than a weekly staple on the family menu. Americans are buying more gasoline, and natural gas suppliers are finding new industrial customers and building out distribution to more homes, pushing up utility prices.

More importantly, millions of Americans are jobless more than six months, and many adults apparently have left the labor market permanently. Others' skills have rusted and are no longer marketable.

Fed Chair Janet Yellen may express great concern for the plight of families with breadwinners relegated to part-time and temporary employment in a lethargic recovery, but businesses seeking workers in many industries and occupations complain about shortages of qualified applicants.

Average wages may not be keeping up with inflation, but that is because employers are creating millions of low-wage jobs in restaurants and the like. Yet shortages constrain jobs growth in many higher paying skill-intensive activities such as finance, technology and manufacturing. And for those with specialized skills, wage gains are contributing to increasing income inequality.

So far, the housing takeoff has simply not taken off. Prices are rising, but new home construction remains well below pre-crisis levels and has disappointed forecasters so far this year.

According to the S&P Case-Shiller survey, existing home prices in the 20 largest metropolitan markets are up nearly 13% during the last year. Yet this spring, builders report very slow traffic in new-home showrooms.

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