CPI Leaps 0.5%, Raising Specter of Fed Action
Consumer prices rose a surprisingly sharp 0.5% in September, dramatizing the impact of soaring energy costs on the U.S. economy and sparking fears that the Federal Reserve will have to push up interest rates again to combat inflation.
While much of the rise was attributed to a temporary jolt in oil prices, economists also pointed out that the core rate of inflation, a figure that does not include energy or food, has also begun to creep upward.
Nonetheless, most agreed that Fed officials would need more evidence of inflation before they decide to push up interest rates.
“While inflation is not yet out of control, there is a steady spreading and upward creep in the inflation rate that has to worry [the Fed],” said Joel Naroff, an economic consultant in Holland, Pa. “If inflation continues to move higher,” he added, “a rate hike becomes a real possibility.”
After years of stunningly favorable economic news, a more sober tone in some recent economic reports has caught the attention of many forecasters. Recent signs of slower growth combined with soaring energy costs even remind some of the “stagflation” in the late 1970s, when the U.S. economy was caught in a vice of sluggish growth and high inflation.
For now, however, most experts believe that the pressures against inflation--most notably a highly competitive, deregulated U.S. economy and the productivity enhancements brought by information technology--make a lasting revival of the problem unlikely.
“The surge in the CPI last month should be viewed more as a one-time surge of the economic surf than as the start of a tsunami,” maintained Jerry Jasinowski, president of the National Assn. of Manufacturers.
Wall Street was initially shocked by the report, which contributed to an early plunge of more than 433 points in the Dow Jones industrial average. That loss was largely recouped as the day progressed. Certainly, the inflation report challenged optimism that the economy has become immune to inflation in today’s competitive era, or that non-energy related firms are unable to raise prices without suffering a loss of business.
The increase in consumer inflation was the biggest since June. Gasoline, which had plunged by 6% in August, reversed course with a 5.4% surge in September. The pattern was similar for other energy-related expenses. Home heating oil rocketed 12.2%, and natural gas jumped 5.1%. Overall, energy costs rose 3.8%, following a decline of 2.9% in August.
So far this year, gasoline prices have shot up at a 22.4% rate, and heating oil has surged at a feverish pace of 49.4%.
Price increases have moved beyond energy, however. The core rate of inflation increased 0.3%, after five straight months in the 0.2% range, a rise that was affected by an exceptionally steep 1.6% boost in apparel prices, the largest hike in a decade. There were also price increases for medical care (0.4%, with hospital costs up 0.6%); housing, 0.4%; and tobacco, 3.5%.
“Medical-care prices are on the rise, it costs more to eat out, education expenses just keep surging, and smokers paid a lot more for their products,” Naroff said. “About the only bright spots were the continued collapse in computer prices and declines in new motor vehicle prices.”
Not everyone was so gloomy. Some analysts said the pattern of non-energy price hikes was unspectacular, and that a drop in fuel costs would begin to pull the inflation index down in the coming months.
Bill Cheney, chief economist with John Hancock Financial Services in Boston, argued that “nothing has changed” except for volatile energy prices and the unusual jump in apparel costs, for new fall and winter clothing lines.
“We’re right where we’ve been for the past six months, in a generally benign inflation environment,” he said. “The slight rise in the core CPI is simply no cause for concern. I can’t imagine this report will cause the Fed to reconsider its stance on rates.”
Fed officials have increased interest rates six times since June 1999 in an effort to prevent an outbreak of inflation at a time when the economy was running hard. Earlier this month, Fed officials refrained from hiking rates, but cautioned that the increase in energy prices “poses a risk of raising inflation expectations” which could begin to create inflation in wages.
Still, economists were doubtful that oil-related problems would take down the broader economy. “Overall, the numbers aren’t good but the details are less alarming,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.
Because of the higher inflation, the Social Security Administration announced Wednesday that the 45.2-million Americans getting Social Security checks will see their monthly benefits go up 3.5% next year, the biggest cost-of-living adjustment since 1992.
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The next president may face some stark changes in the economy. A1
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Consumer Price Index
Monthly percentage change, seasonally adjusted:
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September 0.5%
Source: Bureau of Labor Statistics
