Inflation Barometer Takes Unexpected Leap

A key inflation measure took its biggest one-month leap of the decade last month, the government said Friday, raising fears that the easy economic sailing of recent years may be over.

The producer price index, which measures inflation before it reaches the consumer, jumped a surprising 1.1% in September, the Labor Department reported. Even without increases unlikely to be repeated in food and energy, the index rose substantially more than economists had expected. The government will release its consumer price index, a measure of inflation at the household level, on Tuesday.

Over the last year, producer prices have risen 3.2%, their largest 12-month increase since 1991.

“It’s another nail in the coffin of low inflation and strong growth,” lamented Sung Won Sohn, chief economist of Wells Fargo & Co. in Minneapolis. “Until now there have only been telltale signs of inflation. Now there’s something tangible.”

The news led both analysts and investors to predict another interest rate hike by the Federal Reserve when its policymaking body next meets on Nov. 16. Higher interest rates impede economic activity and thus tend to cool inflationary fires.

Contributing to expectations of a rate increase were remarks Thursday night by Federal Reserve Chairman Alan Greenspan, who told a conference of bankers that they should be setting aside more money “to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence.”

Although Greenspan’s remarks were similar to ones he has made before, analysts took their timing and their conjunction with the new inflation report as fresh evidence that the central bank would raise rates.

“The Fed is bound and determined to make sure inflation doesn’t get out of hand, and that means rates are going up,” said Richard B. Berner, chief U.S. economist for Morgan Stanley, Dean Witter & Co. in New York.

On its face, last month’s jump in the producer price index hardly seemed a harbinger of economic trouble. Much of it was due to onetime hikes rather than any underlying trend.

Cigarette prices, for example, soared 9.5%. But the rise was almost entirely the product of efforts by tobacco companies to pay for their multibillion-dollar legal settlement with the states. Car prices rose 2%, but analysts said that was largely the result of auto makers introducing new souped-up models, not raising prices on old ones.

Even where the index increase reflected an important trend--such as the 2.2% jump in gasoline, heating oil and natural gas prices--some analysts played down the economic significance. “Look, a gallon of gas is still cheaper than a gallon of bottled water,” said Richard Yamarone, senior economist at Argus Research Corp. in New York.

Shorn of volatile food and energy prices, the so-called core index rose 0.8% in September, lower than the 1.1% overall increase but still well above the 0.5% consensus forecast of economists. Stripped of food, energy, tobacco and auto prices, it rose only 0.1%.

Nevertheless, a wide variety of analysts expressed deep dismay over the new numbers, warning that they came amid other economic signs that inflation is reviving and that they could spell the end of the untroubled economic growth that the nation has enjoyed in recent years.

“The trend is now clear. Inflationary pressures are building and prices are rising,” said Oscar Gonzalez, an economist at John Hancock Mutual Life Insurance Co. in Boston.

“The easy life is over for U.S. equities and the economy,” added Allen Sinai, chief global economist for Primark Decision Economics, also in Boston.

The producer price index focuses on the goods-making sector, which accounts for only about 20% of the U.S. economy, and largely misses what is happening to labor costs. But a string of recent reports suggests that labor costs are rising even more rapidly than producer prices.

The Labor Department said last week that American workers got their biggest wage gain in 16 years in September, when average hourly earnings rose 7 cents, or 0.5%, to $13.37. If sustained over 12 months, that would amount to a 6.5% pay hike, a dramatic pickup from previous years.

Analysts said that several recent labor settlements point to even steeper increases ahead. Boeing Co. workers approved a contract that will raise hourly wages 16% over three years. Ford Motor Co. workers have tentatively agreed to a contract that would give them 3% annual raises as well as cost-of-living adjustments and $1,350 signing bonuses.

“As more and more examples of price increases pile up and we get bottlenecks, we’re not going to be able to avoid inflation,” said Mark M. Zandi, chief economist of RFA Dismal Sciences Inc., a West Chester, Pa., forecasting firm. “This economy just has to cool off.”

Federal Reserve policymakers have tried twice in recent months to rein in growth by raising interest rates, but so far with little success. Greenspan said in a speech last summer that the central bank would like to see the economy growing at a 3% rate, but most analysts believe it is still growing at 4% or better.

Whether the Fed raises rates further will be determined by a string of economic reports due out shortly. Analysts said that uncertainty about what the reports would show, together with fears the nation’s stock market could face the kind of gut-wrenching drops it suffered in each of the last two Octobers and in October of 1987, should make the next few weeks an especially nervous time for investors and policymakers.

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Inflation’s Rebirth

The Producer Price Index, which measures inflation on wholesale goods.

Source: Bureau of Labor Statistics