Oil-shocked consumers were smacked by a 1.6 percent jump in wholesale prices in September as the record-breaking surge in gasoline prices continued its assault on a stalled U.S. economy that most economists agree is in a recession.
The Labor Department blamed virtually all of the steep increase in the producer price index on the higher oil costs resulting from Iraq`s Aug. 2 invasion of Kuwait.
A 20.6 percent increase in gasoline last month was the highest one-month rise recorded since the government began tracking the commodity in 1947, the government said.
The core inflation rate also moved sharply higher. The rest of the producer price index, excluding volatile gasoline and food, moved up 0.6 percent, or a 7.2 percent annual rate.
However, Wall Street shrugged off the negative economic news, and the Dow Jones industrial average advanced 32.92 points to 2398.02, cutting its loss for the week to 112.62 points. Analysts called the day`s move a technical rally.
Last month`s increase in the producer price index was the biggest jump in wholesale inflation since a December cold snap sent prices up 1.9 percent in January and followed a similarly sharp increase of 1.3 percent in August.
The August-September price increases were the biggest two-month jump in producer prices since 1980, the government said.
”This is going to take a considerable bite out of consumer purchasing power,” said Robert Dederick, chief economist for Northern Trust Co. ”It`s the worst of both worlds phenomenon. Inflation goes higher while your real income goes lower.”
”There`s no doubt there`s been a big drop in consumer confidence,” said David Hale, chief economist with Kemper Financial Services Inc. ”We can`t sustain $40-per-barrel oil. Something has got to give.”
What appears to be giving is the U.S. economy. Most economists agree the nation is in a recession, with the debate focused on how long and how deep it will be.
”Originally, we were a little more optimistic,” said Gordon Richards, economist at the National Association of Manufacturers, which says the recession began in August. ”Now, we`re looking at something more serious” as a result of the oil price bubble lasting longer than anticipated.
The immediate report from the consumer front indicates that households are continuing to pump out cash in an effort to keep up with rising prices. The Commerce Department reported Friday that retail sales rose 1.1 percent in September, bolstered by the soaring cost of gasoline.
Excluding gasoline, sales rose 0.8 percent in the month. Overall, sales rose $1.6 billion to a seasonally adjusted $151.2 billion, the government said.
But economists don`t think consumers, the chief engine of the eight-year economic expansion now coming to an end, can keep up the pace.
”The consumer`s initial reaction to higher prices is to take it out of savings,” said Dederick. ”But after a while they will adjust spending patterns. Consumer confidence has fallen dramatically.”
Analysts said the inflation outbreak, coupled with the relatively positive retail sales report, deepens the dilemma for the Federal Reserve. The central bank has been under pressure from the Bush administration to ease its inflation-fighting campaign and lower interest rates to spur the economy.
”How in the world can the Fed ease? The consumer hasn`t rolled over, and inflation is rebelling. The two reports give a further reason for the Fed to remain frozen in its current posture,” Dederick said.
The September rise in wholesale prices would translate into an annual increase of 20.9 percent, the government said.
That is far above the 3 percent advance, at an annual rate, in the producer price index from January through July, before the Middle East erupted. With August and September increases figured in, wholesale inflation has increased at an annual rate of 6.3 percent in 1990, the government said.
In September, energy costs overall rose 13.8 percent. In addition to gasoline`s 20.6 percent jump, fuel oil rose 21.3 percent. Natural gas was up 1.3 percent.
Food prices, meanwhile, were down 0.9 percent after rising 0.8 percent in August. Fresh fruit prices fell 3.6 percent and vegetables were down 4.8 percent.
Egg prices, which had soared 25.8 percent in August, fell 7 percent.
Costs were down for rice, pasta, beef and pork but up for bakery products, chickens and turkeys.
The 0.6 percent jump in the so-called core rate followed a 0.3 percent gain in August.
Passenger car prices were up 3.4 percent after having risen 0.8 percent in August, the government said.
However, Dederick called the car price rise an ”aberration.”
”Auto prices actually were up only 0.2 percent during the month, but because of seasonal adjustments, they put them up 3.4,” he said. ”This is a hangover from the years when there was significant price cutting at the end of the model years. That phenomenon has really faded as the model years fade into one another.”
