Inflation Jumps in September; Output Slows

Inflation surged in September despite continuing weakness in the economy, the government reported Thursday, intensifying the Bush Administration’s worries about the economy just as the 1992 presidential campaign is getting under way.

The Labor Department’s monthly consumer price index jumped by 0.4% in September, more than double the 0.2% increases in each of the three previous months and the fastest pace recorded since last January. Consumer prices in Southern California rose by 0.6%.

Meanwhile, the Federal Reserve Board reported that industrial production, a key measure of economic activity, edged up a scant 0.1% in September, suggesting that the manufacturing sector--which had been leading the anemic recovery--may be encountering new difficulties.

The combination of figures raised new fears that the economy may be facing a heightened danger--that inflation is accelerating at a time when the already sluggish recovery is running out of steam.

Most of the rise in consumer prices were attributed to higher costs for energy, food, housing and services.

President Bush, frustrated by the slow pace of the recovery as he prepares for the 1992 campaign, signaled Thursday that he plans to unveil a package of tax cuts to help spur the economy, but he stopped short of announcing specific proposals.

Following a meeting with GOP lawmakers, Administration officials disclosed that the White House is considering proposing a cut in capital gains taxes and an expansion of individual retirement accounts.

Despite the larger-than-expected increase in the consumer price index, the Administration announced that the nation’s 43 million Social Security recipients will receive a 3.7% cost of living increase in January--the smallest in five years, thanks to low inflation over the year.

The rise will boost the monthly benefit for the average retiree to $629, up from $607 a month now. The inflation adjustment is calculated every October following publication of the consumer price index for September.

Separately, the Commerce Department announced that, partly because of a rare falloff in U.S. exports, the nation’s foreign trade deficit widened again in August, rising to $6.8 billion. It was $5.9 billion in July.

Analysts said that the drop-off in exports is ominous because it suggests a slowing of economic growth abroad at a time when exports had been a major factor keeping the U.S. recovery going. They warned that a falloff in foreign buying could quickly prove a drag on the economy here.

Economists were uniformly bearish in assessing the implications of Thursday’s statistics, with some speculating that the recovery that has been in force since mid-summer might well prove to be short-lived.

Some suggested that the new surge in inflation would only make it more difficult for the Federal Reserve Board to cut interest rates further, a step that the Administration--and some outside economists as well--say is needed to help spur the economy.

“There is legitimate concern now over whether the recovery is fizzling, and there is unwelcome higher inflation, especially on the services side,” said Allen Sinai, economist for the Boston Co., a New York investment firm.

And Donald Ratajczak, economist for the Georgia State University forecasting service in Atlanta, said that the increase in inflation would place the Fed in a box. The central bank “is unlikely to move with this kind of CPI (inflation figure) on the table,” Ratajczak said.

The latest speedup in the price index followed nine months of unusually low inflation. Including the September report, consumer prices have risen at only a 2.9% annual rate so far this year--compared to a 6.1% jump for all of 1990.

Most of the change was due to oil prices. They had zoomed late last year and suddenly collapsed as fears rose and fell with the progress of the Persian Gulf crisis. But energy prices climbed again with a vengeance, soaring a full 1% in September.

Excluding food and energy, whose prices are volatile, the so-called underlying inflation rate has remained near 4.5% this year, compared to 5.1% in 1990--a slight improvement, but a signal that inflation is far from vanquished.

But besides the big jump in energy costs, much of the increase in September was in prices of services, which, ironically, had been hit hard in the recent recession and had been expected to remain relatively stable.

Prices for medical services, for example, surged another 0.7% in September, while the category of education and personal services, which includes mounting tuition costs, also rose 0.7%. Housing costs soared by 0.5% last month.

The September rise brought the overall consumer price index to 137.2% of its level in 1982-84, meaning it took $137.20 to buy the same basket of goods and services last month that cost $100 just nine years ago.

The figures on industrial production also were disappointing, coming after relatively robust increases in three previous months, and suggesting what Michael Penzer, economist for the Bank of America in San Francisco, said was a recovery that is “close to stalling.”

Moreover, analysts said, even those figures were bloated by a big 7.7% increase in production of cars, trucks and parts, which they said may be primarily for replenishing depleted inventories. Auto production had slid by 4.1% in August.

The decline in U.S. exports in August was spread virtually across the economy, affecting manufactured goods as well as industrial materials. Because of slow demand at home, imports of capital goods and consumer goods also declined.

At the same time, imports of petroleum and petroleum products, which cost more in August, rose above the monthly average for the year by 31 million barrels and contributed $500 million to the trade deficit.

Commerce Secretary Robert A. Mosbacher argued in a statement that most of the deterioration in the trade balance in August was caused by higher oil imports. Excluding oil, the nation’s trade deficit in August was only $2.7 billion--up from $2.5 billion in July.

Despite the imbalance in August, the United States still appears headed for an improvement over last year’s trade figure. The department estimated that the deficit for 1991 is likely to total $64.1 billion, well below the $101.7 billion for 1990.

In a speech carried by satellite to an Associated Press managing editors’ conference in Detroit, Bush argued that his tax cut proposals would “instantly restore much-needed confidence in our economic progress.”

He said that a capital gains cut would “set off an explosion of small business formation” and “give our economy a much-needed boost.”

But it is not clear yet whether the White House will push the tax package in Congress this year or merely use it in an effort to persuade voters that Bush is actively trying to deal with the economic situation.

The Administration itself is split over the strategy, and some GOP lawmakers fear that the package would give Democrats an opening to push their own economic proposals. Many of the items expected to be in Bush’s plan have been proposed before--and rejected by Congress.

Bush accused the Democratic-controlled Congress Thursday of having “chosen to avoid these proposals, either by preventing votes or by changing the subject.”

The meeting Thursday with GOP lawmakers was the latest in a series of such sessions convened by Bush in recent weeks to blunt criticism that he has been preoccupied with foreign affairs at the expense of the domestic economy.

Times staff writer Douglas Jehl contributed to this article.