U.S. Economy: Producer Prices Increase By Most in 15 Years
U.S. Economy: Producer Prices Increase By Most in 15 Years
Oct. 18 (Bloomberg) -- U.S. producer prices rose in September by the most in 15 years as higher crude oil and gasoline prices stemming from Hurricane Katrina filtered through into increased costs for chemicals, steel and plastics.
The 1.9 percent surge in prices paid to factories, farmers and other producers was more than forecast and followed a 0.6 percent rise in August, the Labor Department said today in Washington. The core measure, which excludes fuel and food, rose 0.3 percent after no change a month earlier.
Higher costs for raw materials such as crude oil and partially finished goods including lumber and chemicals are raising concerns consumer inflation will eventually accelerate. With some companies such as General Electric Co. boosting prices to cover their costs, Federal Reserve policy makers will keep raising interest rates through early 2006, economists said.
``Slowly but inexorably, inflationary pressures are building across the economy,'' said Joel Naroff, president of Naroff Economic Advisers in Holland, Pennsylvania. ``While I've said on many occasions that the pathway from wholesale to retail prices is hardly direct, the broad-based nature of the increases is worrisome.''
Economists expected the producer price index to rise 1.2 percent, according to the median of 64 forecasts in a Bloomberg News survey. Excluding food and energy, prices were expected to rise 0.2 percent.
Signs of accelerating producer prices initially caused yields on the 10-year Treasury note to rise. The yield declined after a U.S. Treasury Department report showed a $91.3 billion increase in net holdings of U.S. assets by international investors. The 4 1/4 percent note maturing in August 2015 increased 1/16, pushing down the yield 12 basis points to 4.49 percent, at 10:18 a.m. in New York.
Energy Prices
Hurricane Katrina swept through the U.S. Gulf Coast on Aug. 29, disabling drilling platforms and pipelines. The producer price report for September is the first to reflect the effects of record energy prices resulting from the storm. Crude oil prices reached a record $70.85 a barrel on Aug. 30 and have remained above $60 a barrel since then.
Fed Chairman Alan Greenspan said rising fuel costs have drained purchasing power and will weigh on the global expansion. In a speech to Japanese businessmen in Tokyo, Greenspan gave no indication of how the central bank would respond to expectations of slower growth and rising inflation at its Nov. 1 policy meeting.
``Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on,'' Greenspan said.
This Year
Producer prices were up 6.9 percent for the 12 months ended in September, compared with a 5.1 percent year-over-year gain the previous month. Core prices were 2.6 percent higher, after a 2.4 percent increase in August.
So far this year, producer prices are rising at a 6.4 percent annual rate and core prices are rising at a 2.5 percent annual pace.
``Our price increases more than offset the pressure we had from material inflation,'' Keith Sherin, chief financial officer of General Electric, said on a conference call Oct. 14.
The cost of intermediate goods, products that are partially finished such as lumber and steel, rose 2.5 percent, the biggest increase in 31 years. The increase followed a rise of 0.7 percent in August.
Excluding food and energy, intermediate prices rose 1.2 percent, after falling 0.1 percent the month before. Prices for steel mill products rose 3.7 percent, chemicals jumped 6.8 percent and plastics increased 3.9 percent.
Construction Materials
Demand for construction materials for rebuilding after the hurricanes sent prices soaring. Plywood prices rose 14 percent and costs of building paper and board increased 13 percent.
``We are going to start seeing somewhat of a turn'' in manufacturers of intermediate goods being able to pass on higher costs, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.
Prices of materials used at the earliest stage of the production process, including scrap steel and timber, rose 10.2 percent after rising 2.3 percent in August. Excluding food and energy, core raw materials prices rose 5.3 percent.
``The energy shock and the absorption of those costs into our system are putting real pressure on all of our businesses to increase their prices,'' Pete Correll, chief executive of Georgia- Pacific Corp., the biggest maker of plywood in North America, said in an interview on Oct. 7. ``The retailer and the consumer understand that there is an energy crisis and that prices have gone up dramatically.''
Forecast
The increase in fuel costs may trigger the biggest annual increase in U.S. consumer prices in 15 years as well as another increase in interest rates, according to a survey of economists taken by Bloomberg from Oct. 3 through Oct. 10. The consumer price index will rise 3.7 percent for this year, according to the survey. That would be the biggest gain since 6.1 percent in 1990.
The same survey showed economic growth would slow to a 3.1 percent pace the last three months of the year, from the third quarter's projected 3.4 percent annual rate. The Commerce Department will release its preliminary estimate of third-quarter growth on Oct. 28.
The consumer price index for September rose 1.2 percent, the biggest increase in 25 years, the Labor Department said on Oct. 14. Excluding energy and food, prices paid by consumers rose 0.1 percent.
``We are only now starting to hear indications of increased pricing power,'' Fed Governor Mark Olson said in a speech at Seattle University's Albers School of Business and Economics. ``But it is still anecdotal. We don't see it across the board.''
Auto Prices
Finished energy product prices rose 7.1 percent last month, the biggest jump since October 1990, after climbing 3.7 percent in August. The price of gasoline rose 12.7 percent and the cost of natural gas rose 9.0 percent.
Passenger car prices rose 0.9 percent last month after falling 1.3 percent in August. The cost of computers fell 2.6 percent after a 0.4 percent decline the month before.
GE, based in Fairfield, Connecticut, said earnings in the third quarter rose 15 percent, helped by demand for products ranging from jet engines to credit cards and the sale of a stake in an insurance company. Revenue at the world's second-largest company by market value rose 9.4 percent.
Food prices rose 1.4 percent, following a 0.3 percent decrease in August, the government said.
Prices for capital equipment rose 0.3 percent, led by prices of trucks and power distribution equipment, following a decrease of 0.1 percent.
Hurricanes Katrina and Rita have cut oil output by 57.6 million barrels since Aug. 26, the U.S. Minerals Management Service said on Oct. 14.
Crude oil and gasoline prices rose on Oct. 17 on concern Tropical Storm Wilma may enter the Gulf of Mexico by the end of this week, further disrupting output of oil and gas.
``The shortage of natural gas is pretty acute and it's going to take a lot to correct that,'' Donald Blankenship, chief executive of Massey Energy Co., said in an interview on Oct. 10.
To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.
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