Wholesale Inflation Soars

Inflation at the wholesale level last month soared by the largest amount in more than 15 years, reflecting the surge in energy prices that occurred following the Gulf Coast hurricanes.

The Labor Department reported that wholesale prices jumped 1.9 percent in September, led by surging prices for gasoline, natural gas and home heating oil after the widespread shutdowns of refineries and oil platforms along the Gulf Coast. Food prices, which had been declining, posted the biggest increase in 11 months as the price of eggs shot up by a record amount.

Excluding the volatile energy and food sectors, the so-called core rate of inflation also posted a worrisome increase of 0.3 percent after showing no increase at all in August.

The news on wholesale prices followed a report Friday that consumer prices had risen by 1.2 percent in September, the biggest one-month increase in a quarter-century as gasoline prices at the pump climbed by a record 17.9 percent.

While the core rate of inflation at the consumer level was well-behaved, rising by a tiny 0.1 percent, the worry is that the sizable increases in energy will soon begin to spill over into more widespread inflation pressures.

"There's nothing more pernicious on the economy than rising and high energy prices, so hopefully, these energy prices are the worst of it and we see some moderation as we make our way into next year," Economy.com chief economist Mark Zandi told CBS Radio News. "Many of us are going to have a very difficult choice: Are we going to fill our gasoline tank, put our thermostat at 68 degrees, or are we going to have the same number of toys under the Christmas tree?"

A number of Federal Reserve officials in recent weeks have expressed such concerns. 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."

Greenspan did not quantify how much of a slowdown will occur, but private economists are forecasting that the hit from Katrina and Rita could shave as much as a full percentage point from economic growth in the final six months of this year.

Analysts believe the Federal Reserve, which boosted interest rates for an 11th time last month, will keep raising rates in November and December in an effort to keep the energy price surge from becoming embedded in more widespread inflation pressures.

The 1.9 percent jump in wholesale prices matched a similar rise in January 1990. The 1.9 percent jump has not been surpassed since a 2 percent jump in November 1974, a period when the country was coping with surging energy prices following the 1973 Arab oil embargo.

Over the past 12 months, the Produce Price Index, which measures inflation pressures before they reach the consumer, 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. The increase reflected a 12.7 percent rise in the price of gasoline, a 9 percent increase in natural gas and a 4.8 percent increase in home heating oil.

The price of food shot up 1.4 percent last month, reflecting a record 49.3 percent increase in egg prices. Vegetable prices rose by 16 percent, reflecting big increases for snap beans, tomatoes, cabbage, potatoes and broccoli.

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.

The price of new cars was up 0.9 percent in September with the price of light trucks up 0.5 percent.

The PPI showed inflation pressures showing up at earlier stages of production. The price of intermediate goods rose by 2.5 percent, the biggest increase in 31 years, while the price of crude goods jumped 10.2 percent, the biggest increase in more than two years.

The concern is that businesses, which so far have held the line on passing on the higher cost of their materials, may be forced to start raising prices to cope with surging energy costs.