About three-fourths of the 0.3 percent gain in the Producer Price Index was due to a phantom price increase for cars and trucks.
The 0.3 percent rise in the September PPI was the most since an identical increase in September 1997. The core rate, which excludes food and energy prices, rose 0.4 percent in September, the most since the 0.5 percent rise in March. The PPI fell 0.4 percent in August and the core rate dropped 0.1 percent.
Economists were taken off guard by the boost in inflation at the factory and wholesale level, expecting no change in the PPI and a slight 0.1 percent rise in the core rate. The PPI has fallen 0.8 percent so far in 1998. In the past 12 months, the PPI has fallen 0.9 percent.
Economists were apparently blindsided by the way the Labor Department adjusts car and truck prices for seasonal factors. Typically, automakers and dealers heavily discount prices in September to move older models and make way for the new inventory. But this year, automakers began to lower their prices in August to lure back buyers who had been put off by the strike at General Motors (GM). Car and truck prices actually continued to fall in September, but because they didn't fall as much as they had in earlier years, the index showed a hefty rise when seasonally adjusted.
In unadjusted terms, car prices fell 0.4 percent in September and truck prices dropped 0.6 percent. In seasonally adjusted terms, car prices rose 2.2 percent in September and truck prices increased 2 percent.
Car prices have fallen 0.7 percent in the past year while truck prices are down 2.5 percent.
Other data released Thursday added to a picture of an economy that is generally healthy with continued weakness in manufacturing. The Federal Reserve Bank of Philadelphia index was negative for the second straight month at -6.1, although new orders improved and shipments remained positive. Both prices paid and prices received were at or near 30-year lows.
Despite the rise in the PPI, the Labor Department report also showed little reason to worry about inflation. "The underlying results are a lot more benign that the headline number would suggest," said Sherry Cooper, chief economist at Nesbitt Burns.
In September, prices paid to producers for finished food goods rose 0.4 percent as vegetable prices soared 12.4 percent. Prices for finished energy goods fell 0.1 percent, the sixth decline this year. Gasoline prices tumbled 2 percent. Heating oil prices rose 6.6 percent.
Prices of finished consumer goods rose 0.4 percent and prices of finished capital equipment rose 0.4 percent. Most of the increase in both indexes was due to sharp increases in car and truck prices. Car prices soared 2.2 percent in September, the most in eight years. Truck prices rose 2 percent, the biggest jump since Apri 1987.
The Labor Department will report on the Consumer Price Index on Friday. Comforted by the (temporary) disappearance of inflation, Federal Reserve policymakers lowered short-term interest rates last month in an effort to inoculate the U.S. economy against the financial turmoil plaguing much of Asia and Latin America.
Many analysts expect further rate cuts in the coming months, but a sharp, sustained rise in inflation could put those moves on hold.
The PPI report contains evidence that September's increase might be an aberration. Intermediate goods prices fell 0.2 percent and crude goods prices dropped 1.6 percent, the fifth decline in a row.
Lower materials prices, mostly stemming from overproduction and low demand worldwide, have been the main factor restraining U.S. inflation. That factor appears to still be in place.
In a separate report, the department said initial claims for unemployment benefits rose 2,000 to 303,000 in the latest week while the four-week average rose 750 to 297,000. The number hit the consensus forecast and indicates that labor markets remain tight with few job losses.
The Commerce Department also reported that business inventories increased by 0.3 percent in August.
Written By Rex Nutting