Consumer Prices Rise 1.2% as Energy Costs Surge

By Vikas Bajaj –
Inflation rose to its highest monthly rate in more than 25 years in September, the government reported today, reflecting the surge in gasoline and natural gas prices after Hurricane Katrina struck the Gulf Coast.
But excluding the soaring energy costs, prices remained restrained through most of the economy.

The overall consumer price index, which has been on a far more steady rise through much of the year, surged 1.2 percent last month, the fastest monthly pace since March 1980, the Labor Department reported. Still, the core inflation rate, which excludes volatile energy and food prices, rose just 0.1 percent, a rate that has stayed steady for the last four months.
The inflation figures were perhaps the most closely followed of the economic data released today. The other reports showed that retail sales rose at a moderate pace after sliding in August, consumer confidence dropped for the third month in a row, and industrial production declined as the two hurricanes and a strike at Boeing idled assembly lines, oil rigs, chemical plants and refineries.
The Commerce Department reported that retail sales increased by 0.2 percent in September, slower than the 0.5 percent gain may economists had expected. Sales had fallen by 2.1 percent in August, as big discounts by Detroit’s big three automakers wound down.
Retail sales in September were also depressed by the end of heavy auto discounting; excluding cars, sales rose 1.1 percent. But last month’s sales figures were also skewed by a sharp increase in the dollar value of gasoline purchases as prices at the pump soared past $3 a gallon in many parts of the country. Excluding both cars and gasoline, retail sales rose by 0.6 percent last month.
But for as much as Americans spent, they were not an optimistic group. The University of Michigan survey of consumer confidence fell to 75.4 this month, its lowest reading in 15 years, with respondents expressing pessimism about both current and future economic conditions.
Here again, energy costs, which were up 12 percent last month, are probably the biggest driving forces. Nationally, average retail price for a gallon of regular unleaded gasoline was $2.816 today, up from $1.989 a year ago, according to AAA, the auto club. The government estimates the price of heating homes will rise by 30 percent to 48 percent this winter, depending on what fuel people use.
“We are going to have a winter of discontent,” said Richard Yamarone, director of economic research at Argus Research, noting that consumer spending will be depressed as a result during the coming holiday season.
Another Labor Department report released today showed that the average weekly earnings of about 80 percent of the nation’s labor force – people in manufacturing or nonsupervisory jobs – fell 1.2 percent from August to September when adjusted for inflation. The real wages of this group of Americans has fallen all but four of the last 12 months.
The latest inflation data prompted the Social Security Administration today to raise income benefits for 52 million Americans by 4.1 percent beginning in January. The increase would match the annualized increase in consumer prices faced by the 80 percent of workers in manufacturing and nonsupervisory positions.
The consumer price index as a whole was up 4.7 percent from September 2004. Excluding food and energy, it was up 2 percent.
At the nation’s factories and other industrial plants, production fell 1.3 percent last month, the Federal Reserve reported, mostly because the hurricanes forced energy and chemical companies in the Gulf Coast to halt production. The mining sector, which includes oil and natural gas production, for instance, saw production fall 9.1 percent in the month.
The hurricanes reduced production 1.7 percentage points, which indicates that all things being equal, output would have increased 0.4 percent had the storms not happened.
Today’s economic reports were being closely watched by investors and analysts for indications of how the economy was responding to the shocks of higher energy prices and hurricane devastation. Inflation, for one, appears to be limited largely to energy prices.
The only industry that appears to have successfully passed on some of the cost of higher energy costs is the transportation sector, where prices rose by 5.4 percent last month, after a 2.4 percent jump in August. In other sectors like food, medical care, rent and recreation, prices barely increased; apparel was the only sector to show a decline in prices – down 0.3 percent.
Though economists expect some of the energy inflation will eventually creep into other sectors, the high costs are probably not having a big impact so far because Americans are enjoying cheaper goods and services from overseas particularly China and India, said Stephen Roach, chief economist at Morgan Stanley.
“Energy is being driven by a unique set of forces – supply and demand – that are not bearing down on other goods and services,” Mr. Roach said.
Another key issue for the economy is whether the Federal Reserve, whose officials have repeatedly said they would not tolerate higher inflation, would see the inflation report as necessitating further increases in the short-term interest rate, which they last raised by a quarter point to 3.75 percent last month. Most economists believe policy makers will continue raising rates.
In addition to lowering demand and making loans more expensive, interest rate increases serve a psychological purpose, Mr. Roach said. Inflation feeds on fear: if consumers believe prices are going to be higher next week, they will buy more this week, which will assure that prices will indeed be higher. That is a lesson the Fed learned during the 1970’s energy crisis when annual inflation rates soared past 10 percent.
“By staying disciplined with regard to inflationary policy, the Fed nips any inflationary expectations in the bud,” Mr. Roach said.
The stock market was up slightly and prices of Treasury securities were down slightly this afternoon.
Source: New York Times

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