Wholesale Prices Rise 1.6% in September, Fueled by Oil Costs : Economy: Two-month surge in the producers’ index is the biggest since 1980. Inflation pace makes it less likely the Fed will try to cut interest rates.
Fueled by sharp increases in oil prices, inflation surged ominously during September, the government reported Friday.
Wholesale prices jumped 1.6% for the month, after a 1.3% increase in August. Taken together, the increases mark the biggest two-month gain since 1980 and make it all the more difficult for the Federal Reserve to reduce interest rates.
The September increase, which equates to an annual inflation rate of 20.9%, was primarily attributable to soaring energy costs. Since Iraq’s invasion of Kuwait on Aug. 2, crude oil prices have doubled, nearing $40 a barrel in recent days.
“Inflation is getting out of hand,” said Richard W. Rahn, chief economist at the U.S. Chamber of Commerce.
The worrisome trend was acknowledged by the White House. “Inflation going up is never good news,” White House spokesman Marlin Fitzwater said.
Analysts noted that, even if increases in the volatile energy and food sectors are excluded from September’s producer price index, wholesale prices rose by 0.6% for the month--the equivalent of more than 7% for the year.
“These numbers suggest that the underlying inflation rate has picked up,” said Sara Johnson, an economist at Data Resources Inc. in Boston. “I think we can expect to see steep increases in October and November as well.”
In a separate report, the Commerce Department said retail sales jumped 1.1% in September to a seasonally adjusted $151.2 billion. The increase reflected soaring gasoline prices and rebounding auto sales. Retail sales had declined 0.4% in August.
Although the sales report indicated that higher prices have not yet dampened consumer spending, economists warned that, as recession looms nearer, inflation may hit the economy with a second punch.
“For the time being, we have stagflation,” said Irwin L. Kellner, chief economist at Manufacturers Hanover Bank in New York, referring to the 1970s phenomenon of declining growth accompanied by rising prices. “The economy is weak, and there isn’t enough liquidity in the system.”
Although inflationary pressures are likely to make it more difficult for the Federal Reserve to ease interest rates, Data Resources’ Johnson said she believes the threat of recession should receive priority consideration.
“The primary concern at this stage should be stabilizing the economy by easing interest rates and stimulating demand,” she said. Besides, Johnson added, “recession itself would reduce inflationary pressures.”
“We have inflation because of the temporary increase in oil prices,” Kellner said. He urged the Fed “to release the chokehold . . . on the economy” even before Congress reaches agreement on the federal budget.
The White House, however, refused to criticize the Federal Reserve’s reluctance to ease interest rates to stimulate growth.
“We are concerned about growth and about preventing a recession,” Fitzwater said, “and we think the Fed has recognized all these factors and is on the right course.”
Lyle Gramley, chief economist at the Mortgage Bankers Assn., also supported the current Fed policy. “They have to move with caution and prudence,” he said.
However, Gramley expressed hope that energy-fueled inflation could subside in several months, particularly if the Persian Gulf crisis is resolved without military conflict.
“It’s just clear that, when oil prices double, you are going to have to swallow hard for three to six months. But, if the danger of a shooting war (in the Middle East) recedes, then oil prices can’t stay at $40 per barrel,” he said. “I think we can look forward with confidence to several months of high prices, but I don’t think it will be a disaster.”
As the inflation report was issued, a group of corporate chiefs meeting in Hot Springs, Va., warned that the U.S. economy appears to be tottering on the edge of recession, although it has not yet fallen into a full slump.
“It feels like a recession in some segments, but other segments are quite good,” said John F. Welch Jr., chairman of General Electric Co., mirroring the ambivalent attitude of his colleagues at the Business Council, a group of current and former chief executives.
Recessionary concerns were echoed in a survey of corporate economists presented at the Business Council meeting.
The economy will have a period of “very weak growth” through mid-1991, the economists said in the survey, and “there is a significant chance of recession.” The report blamed oil prices for the reduced growth prospects.
Executives attending the session acknowledged that business conditions clearly had deteriorated since their last gathering in May. But they were not prepared to proclaim the end of the nation’s eight-year economic expansion.
“There is kind of a recession psychology among (auto) dealers and customers,” said Roger B. Smith, recently retired chairman of General Motors Corp. and the Business Council’s chairman.
But “price incentives” should help domestic sales, he said, and foreign prospects are enhanced by growing demand from new markets in Eastern Europe.
Willard C. Butcher, chairman of Chase Manhattan Bank, was more pessimistic, saying the United States is “either already in or entering a recession.”
“There is no place where we are not seeing a softening of business, and in some places a real recession,” Butcher said. “The real estate business is lousy--the bottom has not been reached.”
The Business Council report, based on a survey of 20 corporate economists, forecast anemic economic growth of less than 1% until the middle of 1991, with more vigorous expansion expected in the second half of the year.
A recession is formally defined as two consecutive calendar quarters in which the nation’s output of goods and services declines. Only five of the 20 economists advising the Business Council believed a recession is in the cards.
