Banks Raise Prime to 11%; Highest Rate Since 1984

Several of the nation’s biggest banks Friday 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 put the rate at its highest since it was 10.75% in late 1984.

The last increase, from 10% to 10.5%, was Nov. 28.

Meanwhile, wholesale prices shot up at their fastest pace in nearly three years, the government said Friday 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, the Labor Department said.

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

Rates have been rising due partly to the Federal Reserve’s tightening of credit in an attempt to curb inflation. The prime rate reflects a bank’s costs of borrowing money, including interest it pays on savings accounts and certificates of deposit, and generally reflects more subtle increases in other interest rates.

The rate is watched closely because bankers use it as a basis for calculating interest on corporate loans and for determining many types of fixed and adjustable-rate consumer loans, such as home equity loans.

Rising Cost of Money

Republic said it increased its prime because of its rising cost of money. At Continental Bank, the former Continental Illinois National Bank, officials said they wanted to bring the bank’s rates in line with those on money markets.

Chemical Banking Corp., which owns Chemical Bank, is the nation’s sixth-largest bank holding company.

Continental is owned by Continental Illinois Corp., the nation’s 14th-largest holding company. Republic’s parent, Republic New York Corp., ranked 27th in terms of total assets held June 30, 1988.

The increase in the producer price index 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.

Stock Market Drops

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.

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 for falling inflation and a strong overall economic performance.

Bush, asked about the latest inflation figures while on a visit to Ottawa, said, “I would not make assumptions based on one monthly release” of the producer price index. He said the figures tend to “jump around somewhat.”

The President said that he is “not overly concerned about inflation at this point,” although he added that “I don’t like the figures.”

Economists Skeptical

Private economists, skeptical about the rosy scenario presented by Bush in his speech to Congress Thursday, 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.

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

“We all should wait for another inflation report or two to draw too pessimistic a conclusion, but my fear is that it will ultimately take a major slowdown or recession to get inflation back down to acceptable rates,” Sinai said.

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.

Finished Goods

The index for finished goods, items one step short of the retail level, stood at 111.0 in January, meaning that a hypothetical selection of goods that cost $100 in 1982 would have cost $111 last month, up $1 from the previous month.

Economist David Wyss of Data Resources Inc., of Lexington, Mass., said that the dramatic size of January’s increase was a “one-month aberration” caused largely by rising energy and food prices, but that the overall trend nevertheless has been one of accelerating inflation.

“I think it’s going to be higher again this year and it could be a lot higher if we have another drought,” Wyss said. “Early signs don’t look good. We haven’t had much precipitation east of the Rockies.”

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.

Effects of Drought

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

Wholesale egg prices were up 20.1%, pork rose 11.4%, and prices for bakery products increased 1.3%.

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, automobiles, toys and games, and costume jewelry.

Prices also were up at the earlier stages in the production chain, with intermediate goods up 0.9%, the steepest increase in nearly eight years, while crude goods shot up 3.9%, the biggest rise since August, 1980.

Further Rises Expected

Dirk van Dongen, president of the National Assn. of Wholesaler-Distributors, predicted that those price increases would translate into further rises at the finished-goods level.

“My fear is that we reach a point where an inflation psychology takes root in the economy,” he said. “It begins to feed on itself. Wages begin to chase prices. . . . It’s extremely difficult to get your arms around the problem without severely dampening economic activity.”

The nation will get this year’s first look at inflation on the consumer level with the Feb. 22 release of January’s report on the consumer price index, which measures imports and services in addition to goods. Consumer prices increased 4.4% in 1988.