December 15, 2009 in Business

Rise in wholesale inflation unlikely to last

Associated Press
 

WASHINGTON — Evidence that the economic rebound could eventually raise inflationary pressures emerged in a report Tuesday that wholesale prices surged last month.

Most economists aren’t worried, though. They think the economy remains too weak for the price increases to last.

The Federal Reserve began a two-day meeting Tuesday and is likely weighing the higher-than-expected wholesale inflation. Should inflation pressures mount, the central bank could be forced to start raising interest rates sooner than expected.

But Fed policymakers aren’t likely to raise a key rate at the end of their meeting Wednesday. The Fed has kept rates at record lows to bolster the shaky recovery.

An eventual Fed rate increase could help defuse inflation and boost the value of the dollar against other currencies. But it carries risks. Higher interest rates would raise borrowing costs and squeeze corporate profits. They could send stock prices falling. And they risk derailing the economic recovery.

The economy is growing steadily but slowly. The latest sign was a report Tuesday that industrial production rose a better-than-expected 0.8 percent in November. The portion of industrial capacity in use rose to 71.3 percent, from 70.6 percent in October. It shows that factories, mines and utilities are using more of their plants as the recovery takes root.

Still, even with the gain, capacity use remains far below its long-run average of around 80 percent. Analysts said industrial spare capacity remains so large and demand still so soft that inflationary pressures are likely to remain tame.

Overall wholesale prices jumped 1.8 percent in November, the Labor Department said. That was more than double the gain analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the sharpest increase in more than a year.

Much of the overall increase reflected a jump in energy prices. Yet that increase will likely reverse itself. Analysts noted that oil prices have fallen about 10 percent since the start of the month.

And the higher core rate of wholesale inflation was driven by price increases for light trucks, which may be a temporary factor reflecting a shift to new 2010 models.

“The 1.8 percent jump in wholesale prices is a red herring,” said Paul Dales, U.S. economist at Capital Economics. “The Fed is not going to see this as any indication that their actions are triggering higher inflation.”

One reason is that throughout the economy, few companies have much pricing power in the face of budget-conscious consumers. Kroger Co., for example, posted a lower quarterly profit in part because it’s had to cut prices to compete even as its costs have risen.

And higher retail prices for gasoline have proven unsustainable. Valero Energy Corp., the nation’s largest oil refiner, shuttered a major refinery over the summer. And it plans to close its Delaware City oil refinery.

The price of crude has risen this year, but refiners haven’t been able to pass that along because millions of people have lost jobs and no longer commute. That’s helped drive down demand for gasoline. Valero’s announcement followed a string of other refinery closings.

Retail gas prices peaked at $2.69 in late October and have been falling steadily ever since.

Stronger activity at mines led last month’s increase in industrial production, rising 2.1 percent. The manufacturing sector — the biggest chunk of industrial output — rose 1.1 percent. Utilities fell 1.8 percent, according to the Fed report.

But further gains are likely to be slight. Consumers without jobs or fearful of losing them are holding back spending. Though unemployment dipped in November to 10 percent from 10.2 percent, analysts expect it to resume rising, further dragging on the economy. High unemployment has curbed prices as workers wary of layoffs have moderated wage demands.

“Inflation for the next year or two really will not be a problem in the United States,” said Nariman Behravesh.

Behravesh predicted the Fed would not begin raising interest rates until next fall.

“The recovery is still going to be pretty lackluster and somewhat fragile,” Behravesh said. “The Fed is not going to do anything to upset the apple cart at a time when inflationary pressures remain very muted.”

Wholesale energy prices jumped 6.9 percent in November, the biggest surge since August. Gasoline prices rose 14.2 percent. And the cost of home heating oil jumped 18.3 percent last month.

Still, oil prices have fallen in recent days to around $70 a barrel. That’s down from a 2009 high of $82 per barrel hit in October.

Food prices rose 0.5 percent at the wholesale level last month, after a 1.6 percent rise in October. A 4.2 percent increase in the cost of light trucks and sport utility vehicles led the gain.

The Producer Price Index reflects price pressures before they reach the consumer. The government will release its look at consumer prices on Wednesday. Economists say they will show a more moderate gain of 0.4 percent, with core consumer prices expected to rise 0.1 percent.

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