Oct. 14 (Bloomberg) -- U.S. consumer prices rose last month by the most in 25 years as energy costs posted the biggest jump on record after Hurricanes Katrina and Rita. Excluding energy and food, prices rose less than forecast.

Prices paid by consumers increased 1.2 percent in September, after a 0.5 percent rise a month earlier, the Labor Department said in Washington. Excluding energy and food, core prices rose 0.1 percent, less than the median forecast in a Bloomberg News survey for a 0.2 percent rise and matching August's gain.

The core inflation rate hasn't accelerated since March, suggesting companies are having little success passing along higher fuel costs to consumers. Higher energy prices so far haven't kept Americans from spending, and a Commerce Department report today showed retail sales rose 0.2 percent in September. Even so, the Federal Reserve will keep raising interest rates to ensure inflation doesn't take root, economists said.

"There is no sign of an immediate pass through of energy to core prices, but consumers spent with abandon considering their lack of confidence in the continued health of the economy," said Christopher Low, chief economist at FTN Financial in New York. "That is likely to bolster the Fed's fear of future inflation and reinvigorate their will to raise rates."

Consumer confidence unexpectedly fell in October for a third month to the lowest in 13 years in a University of Michigan report today. The university's preliminary index of consumer sentiment decreased to 75.4 from 76.9 in September. The median forecast in a Bloomberg economist survey was 80.

Expectations

Consumer prices rose more than the forecast for a 0.9 percent gain, the median estimate of 69 economists in a Bloomberg survey. Forecasts ranged from 0.3 percent to 1.5 percent.

The core consumer price index was expected to rise 0.2 percent. The benchmark 10-year Treasury note rose 1/16 point, cutting the yield to 4.45 percent at 10:01 a.m. in New York from 4.46 percent yesterday. Inflation worries have helped drive stock prices lower since the end of August and gold prices higher.

So far this year, consumer prices are rising at a 5.1 percent annual rate compared with a 3.3 percent increase at the same time last year. Core prices are rising at a 2 percent annual pace, compared with 2.3 percent in the same nine months of 2004.

"As far as energy prices and core consumer prices, so far it is all smoke and no fire," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd in New York. "Rising energy costs have not yet fed into the costs of other goods, despite many anecdotal signs that prices are being impacted."

Consumer prices were up 4.7 percent for the 12 months ended in September, the most since May 1991, while core prices were 2 percent higher.

Energy Costs

The fact that energy accounted for most of the price gains "will offer only a partial relief, considering that the Fed has been hammering away more at the risk of feed-through price pressures rather than existing core trends," said Andrew Pyle, head of capital markets research at Scotia Capital in Toronto.

Prices Americans paid for gasoline and other energy rose 12 percent in September, the biggest jump ever, after rising 5 percent a month earlier, the Labor Department said today. Gasoline prices rose 17.9 percent and natural gas costs rose 12.1 percent, the Labor Department said.

Workers' earnings adjusted for inflation fell 1.2 percent in September after a 0.5 percent in August, the Labor Department said in a separate release. The September decline suggests consumers have less spending power.

Food prices, which account for about a sixth of the index, rose 0.2 percent in September after rising 0.1 percent the previous months.

Goods Prices

The cost of all goods including cars, apparel and food rose 2.4 percent last month after rising 1.1 percent in August. Goods prices are 6.9 percent higher than in September 2004. Clorox Co., Marriott International Inc., Carnival Corp., Deere & Co. and FedEx Corp. are among companies that are planning to raise prices or have already done so because of higher fuel costs.

Computer prices declined 0.8 percent after a 3.1 percent decline in August. They're 18 percent cheaper than they were at the same time last year. New car prices increased 0.4 percent last month after falling 0.5 percent in August, and the cost of clothing declined 0.1 percent. Used car prices fell 0.4 percent in September.

Housing costs, which include some energy costs and account for more than one-third of the index, increased 0.4 percent after rising 0.2 percent. A category designed to track rental prices increased 0.1 percent.

Service Prices

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets.

Service prices rose 0.4 percent last month and are up 3.2 percent over the last year. The cost of medical care increased 0.3 percent after being unchanged in August. Airfares fell 1.4 percent last month, after falling 2.2 percent the previous month.

At their last policy meeting on Sept. 20, central bankers said "upside risks to inflation appeared to have increased" after the Hurricane Katrina and expected "further rate increases probably would be required." The Fed voted 9-1 last month to raise the overnight bank lending rate to 3.75 percent, the 11th quarter-point increase in a row. Policy makers are forecast to raise the federal funds target to 4 percent on Nov. 1.

Federal Reserve

"Inflation in an underlying sense is not high now, but there is a risk that it could go higher, and that's what we are particularly focused on," Fed Governor Donald Kohn said after a speech this week in Ohio. "Energy prices might affect underlying inflation by affecting expectations about future inflation."

Federal Reserve Chairman Alan Greenspan told a business meeting in Washington on Oct. 12 that the U.S. economy has "weathered reasonably well the steep rise" in energy prices thanks to market-driven incentives and "flexibility."

Miami-based Carnival, the world's largest cruise operator, raised prices by as much as 16 percent. Memphis, Tennessee-based FedEx, the No. 2 U.S. package shipping company, added a surcharge to trucking charges to recover rising diesel fuel costs. Deere, the world's largest maker of farm equipment, said last month that prices of its products will rise 4 percent for the year.

"Our price realization and what our customers are willing to pay for has been very encouraging for us," said Robert Lane, chief executive of Deere, in an Oct. 7 interview on Kiawah Island, South Carolina. "That's why you see another very good profit year coming up and a lot of cash being generated."

Still, other companies are unable to pass on the higher energy prices due to competition. Potlatch Corp., a lumber-and- paper maker, lowered its third-quarter profit forecast because of higher energy costs and said it wasn't planning to raise prices.

"As much as we might like to recoup our costs, that's not something we can arbitrarily do," said Michael Sullivan, spokesman for Spokane, Washington-based Potlatch, in an interview. "It's a highly competitive business."

To contact the reporter on this story:
Bob Willis in Washington  bwillis@bloomberg.net.

Last Updated: October 14, 2005 10:12 EDT

Commentary:
Prior to our two previous major recessions in 1973 and 1981 (16 months) energy prices soared. The same is happening this time around but Greenspan is too inept (nothing new) to see the writing on the wall.