Oil Shock Fuels Both Inflation, Retail Spending

The shock of higher oil prices rippled through the economy in September, sending wholesale inflation soaring 1.6% and artificially stimulating retail sales figures, government reports showed today.

The oil shock brought a weak economy to the brink of recession, and economists warned that huge energy price rises since Iraq’s invasion of Kuwait on Aug. 2 are only starting to be felt.

That leaves federal policy-makers effectively hamstrung, since stimulating lower interest rates might also spark a dangerous round of future price rises.

A record 20.6% climb in gasoline prices last month helped propel the producer price index up 1.6%, the steepest monthly rise since January, the Labor Department said. The index rose 1.3% in August, making this the largest two-month jump since 1980.

The same surge in prices at the gasoline pump contributed to a 1.1% increase in retail sales in September after a 0.4% fall in August, the Commerce Department said in a separate report.

Auto sales also rose as dealers offered incentives to clear out leftover 1990 models.

Although retail sales were artificially boosted by more expensive gasoline, the pickup in overall business showed consumers were not yet completely cowed by rising prices, analysts said.

“Taken together, these two indicators, of course, put another roadblock in the way of Fed easing,” said Robert Dederick, chief economist for Northern Trust Co. in Chicago.

If wholesale inflation continued at the September pace, it would result in an annual rate of 20.9%, the Labor Department said. Economist Allen Sinai of Boston Co. and Economic Advisors Inc. called such a steep rise “horrendous” and said it was only starting.

“The flow-through process for oil price rises is three to nine months, which means inflation is going to remain quite high for a long time,” Sinai said. Inflation is likely to climb above 10% by the final three months of this year, he added.