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Surging Wholesale Prices Raise New Inflation Fears : Big Banks Hike Their Prime Rate

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From Associated Press

Wholesale prices in January shot up at their fastest pace in nearly three years, the government said today in a report that analysts warned could signal spiraling inflation in 1989.

January’s unexpected 1% rise in the producer price index for finished goods was the biggest monthly increase since an identical surge in October, 1985, and was equivalent to a 12.7% annual rate of inflation, the Labor Department said.

The increase was paced by the steepest increase in food prices in a year, the largest rise in energy prices in two years and sharply higher costs in a variety of other categories as well.

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The report roiled financial markets, unleashing a storm of selling in stocks and Treasury bonds, as traders became concerned that the Federal Reserve Board would drive interest rates higher to try to control inflation.

Several of the nation’s biggest banks today increased their prime lending rates to 11% from 10.5%, reflecting the continuing rise of interest rates on financial markets.

It was the first increase this year in the prime rate, which banks use as a benchmark for setting interest on a variety of consumer and corporate loans, and it put the rate at its highest since it was 10.75% in late 1984.

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Chicago-based Continental Bank and Republic National Bank of New York were the first to boost their prime rates and were soon followed by Citibank, the nation’s largest bank, and Chemical Bank.

The first inflation report since the change in administrations brought no good news for President Bush, who just a day earlier unveiled budget and deficit-reduction plans pinned on optimistic assumptions of falling inflation and a strong overall economic performance.

Private economists, skeptical about that rosy scenario, have been predicting slower growth this year and warned that the latest report from the Labor Department could lead the Fed to boost interest rates to restrain the economy and keep inflation in check.

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“The report signals that the economy has launched into another significant ratcheting upward of inflation,” said economist Allen Sinai of the Boston Co.

The producer price index for finished goods had risen 4% during 1988, the steepest climb in seven years and nearly double the 2.2% increase posted in 1987. Many private economists expect further increases this year, although not at the double-digit levels that plagued the nation in 1979 and 1980.

Energy prices were up 4.9% last month, in part reflecting recent acceleration in crude oil prices. January’s increase, the biggest since a 7.2% rise in January, 1987, was paced by an 11.6% rise in home heating oil and also included a 4.1% jump in wholesale gasoline prices and a 4.8% rise in natural gas.

With the after-effects of last summer’s drought still in evidence, food prices one stop short of grocery store shelves were up 1.1% last month, the steepest increase since a 1.5% rise in January, 1988.

But even excluding energy and food costs, wholesale prices were up a moderate 0.4% last month, including sharp increases in children’s apparel, prescription and over-the-counter medicines, books, household electronic equipment, flatware, autos, toys and games and costume jewelry.

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