Wholesale Inflation Rate Jumps Financial Markets Unsettled By News
Wholesale inflation jumped an unexpectedly large 0.5 percent last month as the prices of gasoline, new cars and tobacco all showed big increases.
It was the worst monthly performance this year and gave another jolt to financial markets made jittery earlier in the week by Federal Reserve Chairman Alan Greenspan’s worries about unsustainable growth adding to inflationary pressures.
The Labor Department reported Friday that the rise in its Producer Price Index was the biggest price spike since a similar 0.5 percent increase last December. Wholesale prices rose 0.3 percent in August after a string of declines.
The September price pressures came from a second large monthly increase in energy prices, the biggest jump in new car costs in six years and the impact at the wholesale level of cigarette companies boosting prices to handle pending tobacco settlement costs.
The inflation-sensitive bond market, already nervous about Greenspan’s inflation concerns, fell further on the PPI increase, which was more than double what economists had been expecting. Falling demand pushed the yield on the benchmark 30-year bond up to 6.42 percent.
Stock prices, which were off 58 points earlier in the day, recovered a bit and closed down 16.21 points at 8,045.21.
“This PPI report could be the first warning shot that the long-awaited rise in inflation is at hand,” said Michael Fenollosa of John Hancock Financial Services in Boston.
The August and September gains in wholesale prices followed an unprecedented string of seven straight months of declines. Even with the two months of gains, wholesale inflation has still fallen so far this year at an annual rate of 1.4 percent.
The news on consumer prices has been almost as good. Through August retail prices rose at an annual rate of just 1.6 percent, the best showing in three decades.
That performance, coupled with the lowest unemployment rate in 24 years, had sent Wall Street on a tear, with stock prices climbing close to the all-time record set on Aug. 6.
However, Greenspan raised doubts on Wednesday about the market euphoria, suggesting in congressional testimony that investors had gotten carried away with the good economic news. He insisted that inflation still remained the greatest threat to the expansion, now in its seventh year.
“Chairman Greenspan’s comments were meant to be a warning shot to all those who had been saying we were in a new economic world and inflation is dead,” said Song Won Sohn, chief economist at Norwest Corp. in Minneapolis. “He was saying that the best news on inflation is over and we should expect some unpleasant surprises.”
If the consumer price index report, due next Wednesday, and a report on employment costs on Oct. 28 also show inflationary pressures, that will probably be all the justification the Fed needs to begin another series of rate increases at its Nov. 12 meeting, Sohn said.
For September, energy prices jumped 1.5 percent, the biggest increase since December, while food pressures moderated a bit, and prices edged up just 0.1 percent. Beef, pork and poultry prices actually fell, helping to offset big gains in the prices of fish, strawberries, red delicious apples, avocados and grapes.
Excluding energy and food, the so-called core inflation rate, which better depicts underlying cost pressures, jumped 0.4 percent, the biggest advance in almost two years.
It was driven by a 1.4 percent increase in new car prices and a 3.2 percent rise in tobacco costs, reflecting a 7-cent-a-pack price increase. It was the second big increase this year as cigarette companies build up settlement reserves.
Some economists argued that these big gains were one-time factors, not symptomatic of building inflationary pressures. They noted that without cars and tobacco, the core inflation rate would have been up only 0.1 percent in September, very much in line with the tame showing earlier this year.
A separate report Friday showed that American farmers should produce bumper crops this year.