Wholesale Prices Rebound, Kindle Inflation Fears - Economy: Retail sales also post a robust increase, and the two indexes together may signal a heating-up of consumption.

After three consecutive monthly declines, wholesale prices rebounded by a steep 0.9% in September, pushing the producer price index back toward its May peak and rekindling fears of inflation, the Labor Department reported Friday.

The index had fallen 0.1% in June and 0.4% in July and August. For the first nine months of 1989, wholesale prices have risen at an annual rate of 5.1%.

A long-expected jump in energy prices, reversing a summer-long decline, was responsible for about half of September’s increase. An unusual distortion in the seasonal adjustment for car prices converted a small decline in auto prices into a huge markup that accounted for another 0.2 points of the increase.

“It’s a big number and it’s going to scare some people,” observed David Wyss of Data Resources Inc. in Lexington, Mass. But Wyss, who, like most analysts, took the news in stride, saw only gradually higher inflation in the months ahead.

But in financial markets, the wholesale inflation report coincided with a flood of sell orders provoked, in part, apparently, by news of the apparent breakdown in the $6.75-billion UAL Corp. buyout, and the Dow Jones industrial average plummeted nearly 200 points.

That negative reaction may have been amplified by another economic report Friday. The Commerce Department said that retail sales increased by a surprisingly robust 0.5% in September, after increases of 0.5% in July and 0.7% in August.

The latest retail sales increase combined with the producer price report to revive fears of an economy driven by strong consumption and flirting with the dangers of higher inflation.

That is a recipe for high interest rates engineered by the Federal Reserve, which only a week ago had been expected to let interest rates decline somewhat.

A big factor in September’s retail sales spurt was a 0.8% increase in auto sales, which in turn contributed to a 0.6% increase in sales of durable goods--big-ticket items that last three years or more.

The strong retail sales volume for cars was caused in part by widespread dealer rebates to move unsold 1989 models from sales lots to make way for 1990 models. But it was rebates at the wholesale level, ironically, that accounted in part for the apparent acceleration in inflation for finished goods.

This year, manufacturers began their rebate campaign in August, a month earlier than in the recent past. Thus, an actual decline of 0.5% in wholesale auto prices from August to September was converted to a 3.8% increase by Labor Department statisticians as they compensated for the fact that expected discounts did not occur.

“The auto prices were a statistical fluke, and it’s all because of the timing of rebates, not because of any underlying inflationary surge,” explained Donald Ratajczak, director of the economic forecasting project at Georgia State University.

Energy, the other big culprit in the September inflation story, jumped 6.5% after declines of 7.3% in August, 3% in July and 2.8% in June.

“We knew energy was going to rebound after a soft summer, and the only question was, which month,” Wyss said.

Ratajczak noted that the jump in the wholesale price of finished energy goods is very unlikely to show up at the retail level for the time being because “dealers are getting squeezed and they’re not passing all these energy price increases along.”

Food prices, the other big variable in monthly price moves, declined 0.6%, continuing a leveling off after large increases last winter caused by the 1988 drought.

Without food and energy prices, the “core” rate of inflation at the producer level was logged at 0.7%, the highest since last May. But almost all of that was caused by the seasonal fluke in autos. Without any seasonal adjustment, producer prices excluding food and energy declined 0.1% in September.

“We’re back at a rate of inflation increases about the same as we saw at the end of last year,” said Bruce Steinberg of Merrill Lynch, the New York investment house. “We can probably live with that for now but it’s not sustainable for the long run and it is something the Fed has to concern itself with. What we saw in September is not as bad as it appears, but it does mean that inflation is persistent.”

Before seasonal adjustment, producer prices increased 0.2%, reflecting a 0.2-point increase in the producer price index to 113.5 on a scale in which the 1982 level was 100.