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Wholesale Prices Surge to 15-Year High
Yahoo News/AP
October 18, 2005

WASHINGTON - Wholesale inflation jumped by the largest amount in 15 years in September and there are worrisome signs that soaring energy prices from the hurricanes are beginning to spill over to the rest of the economy.

Prices at the wholesale level rose 1.9 percent, the biggest increase since the first Persian
Gulf War in 1990. Like the 1.2 percent September jump in consumer prices announced last week, the biggest in 25 years, the surge was led by energy costs reflecting the widespread shutdowns of production following Hurricanes Katrina and Rita.

But the report on wholesale prices raised more worries because it showed that outside of food and energy, price pressures were increasing. The so-called "core rate" of wholesale inflation rose by 0.3 percent last month after no change in August.

The rise in wholesale prices stoked inflation fears on Wall Street and sent stock prices tumbling. The Dow Jones industrial average fell 62.84 points to close at 10,285.26.

Of 30 nonfood consumer goods tracked in the wholesale price report, 20 posted price increases and only two — soaps and toys — showed price declines, a marked turnaround from earlier in the year when most categories were showing declines.

Among the big price increases were 1.1 percent for women's apparel, 0.9 percent for passenger cars and 1 percent for heavy trucks, a gain that analysts said may be related to increased demand for vehicles to help in the Gulf Coast clean-up.

"Slowly, but inexorably, inflationary pressures are building across the economy," said Joel Naroff, chief economist at Naroff Economic Advisors, a private consulting firm.

The worry is that a sharp jump in energy prices will begin to put pressure on products outside of energy and cause the underlying rate of inflation to start rising. That could prompt the
Federal Reserve to accelerate its interest rate increases in an effort to slow the economy as a way of keeping inflation from getting out of hand.

However, if tight global supplies keep energy prices at elevated levels, the inflation pressures might intensify even as the economy is slowing, pushing the country into "stagflation" — stagnant growth and rising inflation — something not experienced in America since the oil shocks of the 1970s and early 1980s.

At the moment, analysts said the threat of stagflation was remote in part because the Fed started gradually increasing interest rates 14 months ago to avoid having to slam on the brakes.

Analysts did say they were concerned about government predictions that natural gas to heat homes will cost 48 percent more this winter and home fuel oil will be 32 percent higher, pinching consumers' wallets at a time when they are already paying record prices for gasoline.

"Natural gas is definitely a problem. If we have a mild to normal winter, we are OK. But if we have a colder winter than normal, we just don't have enough natural gas," said David Wyss, chief economist at Standard & Poor's in New York.

In recent weeks, a number of Fed officials have made comments acknowledging growing unease about inflation. In a speech in Tokyo on Tuesday, Federal Reserve Chairman
Alan Greenspan said the jump in energy prices "will undoubtedly be a drag from now on" but he did not quantify how much of an impact it will have on the economy.

Oscar Gonzalez, an economist at John Hancock Financial Services in Boston, said the Fed is likely to keep raising rates at its next three meetings, pushing the federal funds rate, the interest banks charge each other, to 4.5 percent by early next year.

The 1.9 percent jump in wholesale prices matched a similar rise in January 1990 and has not been surpassed since a 2 percent increase in November 1974, another period of surging oil prices caused by the first Arab oil embargo.

Over the past 12 months, the
Producer Price Index, which measures wholesale inflation, has risen by 6.9 percent, the biggest 12-month change since a rise of 7 percent in the 12 months ending in November 1990.

For September, energy prices jumped by 7.1 percent, the biggest one-month gain since a 7.5 percent rise in October 1990. Food costs shot up 1.4 percent, reflecting a record increase in the price of eggs and steep gains in vegetable prices.

Outside of food and energy, the 0.3 percent increase in core inflation was the biggest rise since a 0.4 percent increase in July. Over the past 12 months, core inflation at the wholesale level is up 2.6 percent.

On the Net:

Producer Price Index report: http://www.bls.gov/ppi