Gas Prices Boost Wholesale Inflation

A record jump in gasoline prices pushed wholesale inflation up at the fastest pace in more than three decades in November, while retail sales showed unexpected strength.

The Labor Department said Thursday that wholesale prices rose by 3.2 percent last month, the biggest increase in 34 years, reflecting a 34.8 percent surge in gasoline prices. And outside of energy and food, so-called core inflation posted a 0.4 percent jump, double what had been expected.

But in more upbeat economic news, the Commerce Department reported that retail sales increased by a better-than-expected 1.2 percent last month. It was the biggest sales advance in six months and reflected widespread strength in a number of areas from department stores to clothing shops and furniture stores.

Economists said the retail sales gain should ease concerns that the economy is about to tumble into a recession, although they said overall growth in the current quarter is still likely to be weak given the headwinds battering consumers. Those troubles include the slump in housing, a severe credit crunch and surging energy costs.

All of these problems have pushed consumer confidence down to the lowest point in two years, leading economists to forecast a subpar performance by holiday shoppers this year.

The big jump in wholesale prices was worrisome, economists said, because it was not limited to energy. That suggests that the relentless surge in energy prices could be spreading into more widespread inflation, something that would raise alarm bells at the Federal Reserve.

"I think the Fed has some worries on inflation," said David Wyss, chief economist at Standard & Poor's in New York. "We are starting to see some leakage from energy into other areas of the economy."

At the White House, press secretary Dana Perino said that one bad report on inflation "doesn't make a trend."

"Inflation has remained remarkably low, even in the face of high energy prices," Perino said. "We're confident that Chairman Bernanke takes price stability seriously and considers the risk of inflation in the Fed's policy decisions."

The Fed, struggling to get credit flowing again and to ward off a downturn, cut a key interest rate this week for the third time this year and also announced a global effort with other central banks to pump fresh cash into the banking system.

Wyss said the stronger-than-expected November retail sales performance would probably cause analysts to lift their forecasts for overall growth in the October-to-December quarter to slightly above 1 percent.

Many had trimmed those projections to less than 1 percent, believing that a slowdown in consumer spending, which accounts for two-thirds of total economic activity, and the continued drag from housing could push the country close to a recession.

"The retail sales report helps ease some of the worries about a recession, but it doesn't make them go away altogether," Wyss said. He said he still believed the maximum danger point for a downturn will occur in the first three months of next year.

Half of the November increase in retail sales came from a big jump in gasoline pump prices and therefore was not seen as a sign of strength in consumer demand. But there were widespread gains across a number of other areas including department stores and stores selling clothing, appliances, furniture and building supplies. Auto sales, however, fell for a second month, dropping by 1 percent as domestic manufacturers continue to struggle with weak demand.

The 3.2 percent jump in wholesale prices in November followed a much more moderate 0.1 percent rise in October. Energy costs pushed higher as oil neared $100 per barrel. Gasoline, diesel fuel and home heating oil all showed big gains.

Food costs were flat last month but the price of new cars and light trucks showed sharp increases.

The department's Producer Price Index measures inflation pressures before they reach the consumer. The government will release its look at consumer prices on Friday. Analysts were expecting that report to show a hefty gain of 0.6 percent for overall prices, reflecting the energy surge, but a more moderate 0.2 percent increase in core prices.

In another report, new applications for unemployment benefits dropped last week by 7,000 to 333,000. That was the lowest level since the middle of November and indicated that employers aren't resorting to large-scale layoffs as they cope with the economic slowdown.