Study of Signals

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Prices Make Biggest Jump in 25 Years
By MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON - Consumer prices soared last month by the biggest amount in a quarter-century, propelled by Hurricanes Katrina and Rita and the record gasoline costs in their wake. The storms caused industrial production and consumer confidence to plunge, raising new worries about the economy's ability to bounce back.

The Labor Department reported Friday that inflation jumped 1.2 percent last month. Ninety percent of the increase came from a record-shattering 12 percent surge in energy prices, reflecting tight supplies after widespread shutdowns of refineries and oil and natural gas production along the Gulf Coast.

Those shutdowns contributed to 1.3 percent drop in industrial production in September, the biggest falloff in 23 years.

On the consumer front, retail sales managed to eke out just a 0.2 percent gain in September which would have been a 0.2 percent decline if it had not been for a jump in gasoline sales that reflected the soaring prices that went above $3 per gallon. Much of the weakness reflected a big drop in auto sales after two big months of incentive-induced sales.

The jolt to energy prices from the hurricanes continued to have an adverse effect on consumer confidence, sending the University of Michigan's index down further in mid-October to a 13-year low of 75.4, just the latest evidence that the widespread hurricane devastation was roiling the national economy.

"All these statistics reflect the full force of the hurricanes on the broader economy and we will probably have another month of ugly statistics," said Mark Zandi, chief economist at Economy.com, an economic consulting firm.

In news for retirees, the inflation figures mean more than 48 million Americans will get a 4.1 percent increase in their monthly
Social Security checks next year, the largest in 15 years. That increase, linked to consumer prices, will mean a gain of about $39 a month.

In yet another report, the administration said the federal deficit hit $319 billion for the budget year just ended, down from last year's record red ink but likely to rise again in 2006 because of Katrina-driven spending.

The big jump in inflation last month hit the 80 percent of the workforce in non-supervisory jobs, who saw their average weekly earnings, after adjusting for inflation, fall by a sharp 1.2 percent, the third straight monthly decline, the Labor Department said in a separate report.

While the headline numbers were much worse than expected, some economists insisted that buried inside the reports were reasons to believe that Katrina and Rita will represent a brief bump with the economy resuming stronger growth next year.

The so-called core rate of inflation, which excludes energy and food, posted a modest 0.1 percent increase, better than the 0.2 percent rise that had been expected and the sixth straight month of a benign reading for underlying inflation.

On Wall Street, investors were relieved to see that inflation outside of energy remained well-behaved. The Dow Jones industrial average rose 70.75 points Friday to close at 10,287.34.

"Energy prices are about to leave the solar system, but where is all the other inflation?" asked Joel Naroff, chief economist at Naroff Economic Advisors.

But other economists worried that surging energy costs will soon become embedded in other prices as businesses try to pass on to consumers their higher costs for shipping and materials.

"Every piece of economic data we have received over the last six weeks is showing signs of higher inflation that threatens to erode economic growth," said Richard Yamarone, chief economist at Argus Research in New York. "The aftershocks of the hurricanes may be longer and deeper than many now believe."

The worry is that if inflation pressures become more widespread, the
Federal Reserve, which has been content so far to raise interest rates at a gradual pace, might become more aggressive in hiking rates to fight inflation.

At the White House, officials expressed confidence that Federal Reserve Chairman
Alan Greenspan and his colleagues will be able to manage interest rates to keep inflation under control and the economy moving forward.

Many private economists insisted that they had seen nothing in the government data so far that would cause them to change their forecasts that the hurricanes will shave about three-quarters of a percentage point from growth in the last half of this year and that loss will be made up next year with massive government and private spending to rebuild the devastated areas.

Job losses from the two storms now total 438,000, including an additional 75,000 hurricane-related claims filed last week. But analysts said they believe hurricane-related claims have peaked and will begin declining in coming weeks.

The 12.1 percent surge in energy prices, the largest on record, was led a 17.9 percent jump in gasoline prices, also a record, and gains of 12.1 percent in natural gas prices and 12.7 percent for home heating oil.
http://news.yahoo.com/s/ap/20051014/ap_on_bi_go_ec_fi/economy
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On the Net:

Consumer prices: http://www.bls.gov

Retail sales: http://www.bea.gov