Gasoline costs drive up inflation

Led by higher gasoline prices, consumer inflation shot up in November by the largest amount in more than two years.

The rise in inflation is coming at a time when economic growth is slowing sharply.

“We are in store for a period of very weak if not recessionary growth and uncomfortably high inflation,” said Mark Zandi, chief economist at Moody’s Economy.com. “People are going to get hit with both a weaker job market and having to pay more to fill their gas tanks and buy groceries.”

The Labor Department report Friday showed that its closely watched consumer price index rose by 0.8% last month, the most since September 2005, as energy prices surged by 5.7%, reflecting a big gain in gasoline.

Core inflation, which excludes energy and food, was also up last month, rising by 0.3% as the cost of clothing, airline tickets and prescription drugs all took big jumps.

The bad report on consumer prices was preceded by a report Thursday showing that inflation at the wholesale level jumped by an even larger 3.2% in November, the biggest increase in 34 years.

With one month to go, inflation in 2007 is rising at an annual rate of 4.2%, far above the 2.5% increase in 2006. The acceleration has been driven by energy prices, which are rising at an annual rate of 18.1% this year, compared with an increase of 2.9% in 2006.

The surge in inflation adds another risk to an economy that is already struggling under the weight of a meltdown in housing, a severe credit crunch and faltering consumer confidence. The worry is that the jump in energy costs will leave consumers with less money to spend on other items, worsening the slowdown in economic growth that is already happening.

A separate report showed that average weekly wages fell for a second straight month in November, after adjusting for inflation, and are now 0.8% lower than a year earlier. This means workers’ paychecks are not keeping up with the rise in inflation, a development that is leading to increasing voter unhappiness leading into the 2008 elections.

“Today’s data show that American workers’ real earnings are down because the costs of gas, healthcare and food are rising faster than their wages,” said Sen. Charles E. Schumer (D-N.Y.).

Many economists believe that economic growth in the current October-December quarter could fall below 1% at an annual rate, sharply below the 4.9% rate of growth in the third quarter.

Outside of food and energy, clothing prices, which had been falling most of this year, surged by 0.8% in November, the biggest rise since April 1999. Airline tickets jumped 2.6% and prescription drugs were up 0.8%.

In a separate report, the Federal Reserve said industrial production rose by 0.3% in November, a modest rebound after a big 0.7% drop in October.