Jolt in Oil Prices Sparks Rise in Producer Prices

Fear of war in the Persian Gulf jolted oil prices for the third straight month in October, but slowing economic growth held wholesale price inflation for non-food and non-energy items to zero.

The Labor Department said Friday that its producer price index for finished goods, one step short of retail, jumped seasonally adjusted 1.1% last month.

That followed increases of 1.6% in September and 1.3% in August, bringing the annual inflation rate for the year so far to levels not seen in nine years.

Wholesale prices inflation, on an annual basis was 7% for the first 10 months of 1990, the highest since a 7.1% rise in 1981.

Even though the October number was higher than the predicted 0.7% rise, stock and bond markets rallied immediately after the report because prices outside the volatile food and energy sectors were unchanged. This so-called “core” inflation rate is considered a better indicator of long-term inflationary trends.

“What we have here is an energy problem, which is driving prices higher. Behind that, the economy is very weak and is not creating significant inflationary pressures.” said Ron Schreibman, economist at the National Assn. of Wholesale Distributors.

Traders took the absence of core inflation as a sign the Federal Reserve Board likely would stimulate the economy with lower interest rates.

“What is the Federal Reserve waiting for?” said Gary Ciminero, economist at Fleet/Norstar Financial Group Inc., who said he has expected substantial Fed easing for the last six months.

The central bank, fearful of triggering a fresh round of inflation, has nudged down rates only half a percentage point this year in two increments.

Faced with a severely weakened economy-including falling employment, declining consumer confidence and a sagging retail sector-the Fed’s chief policy-making committee may decide at its meeting Tuesday to allow interest rates to fall to stimulate growth, analysts said.

Economists are optimistic that despite the sharp rises of the last three months, inflation will remain under control unless war in the Middle East destroys Saudi Arabia’s oil production facilities. The economy is simply too weak for most goods producers to pass on higher energy costs, they say.

“This is a significant change from September’s 0.6% rise and may mean that when energy prices abate, inflation could settle down to a much lower rate,” said William McReynolds of the U.S. Chamber of Commerce.

The latest edition of a prominent survey of private economists said the nation likely will topple into a recession before the end of the year.

Blue Chip Economic Indicators of Sedona, Ariz., reported Friday that 44 of the 55 economists in its survey believe a downturn will start before the end of this year. Another three said the slump would start in 1991.

To symbolize the shift, the survey newsletter changed its nameplate from yellow to red for the first time since the 1981-82 recession.

“The climate is not going to be favorable for an increase in inflation,” said economist Robert G. Dederick of Northern Trust Co. in Chicago. “We’re in a bad inflation patch now, but we’ll get through it.”

In October, energy costs led prices higher, rising 8% compared to 13.8% in September and 9.5% the month before that.

Fuel oil prices rose 15% and were 67.5% higher than a year earlier. Natural gas costs, however, edged down 0.3%.

Gasoline prices increased 8% and were 50.2% higher than a year earlier.

Food prices rose 0.9%, the biggest increase since unseasonably cold weather froze southern fruit and vegetable crops in January.

Egg costs were up 9.5%; pork, 8.2%, and beef and turkeys, 5.1%. Prices also rose for vegetables and pasta.

Economist Donald Ratajczak said consumer’ demand for red meat has fallen about as much as is likely and farmers are building their herds in anticipation of growing demand. That means that they are sending fewer animals to slaughter, pushing prices higher.

The increases were partly offset by declines in the prices of fresh fruit, rice, chickens, fish, dairy products, coffee and cooking oils.

In other categories, the price of passenger cars fell 2.7% after jumping 3.4% a month earlier. Economists attributed the fluctuations to the fact that price increases and discounts this year have been out of sync with auto dealers’ usual seasonal pattern.

Other declines were recorded for men’s and boys’ clothing, floor coverings and household flatware. Prices rose 3.4% for newspapers and were also up for books, women’s clothing, cosmetics, tobacco and jewelry.

The various changes left the producer price index for all finished goods at 122.3 in October. That means a hypothetical selection of goods costing $100 in 1982 would have cost $122.30 last month, up from $114.70 a year earlier.

Prices at earlier stages of the production process were also up sharply, driven by energy. Prices rose 1.5% for intermediate-level goods and 8.7% for crude-level goods. Excluding energy and food, however, prices rose only 0.4% at the intermediate level and fell 1.7% at the crude level.

Crude petroleum prices jumped 29.2% in October.