Wholesale Prices Up 1.1%, Biggest Jump Since Sept. 1990

Reflecting the effect of rising energy prices in California and across the country, U.S. wholesale prices leaped 1.1% last month, the biggest increase in more than a decade.

The producer price index jump reported by the federal government Friday signals that businesses will be pushed further to raise prices, cut costs or endure reduced profits.

The unexpectedly strong evidence of inflationary pressure was part of a mixed bag of economic reports. They included another steep falloff in consumer confidence and weaker-than-expected industrial production but, on the other hand, unexpectedly strong home-building.

Taken together, analysts said, the reports suggest the economy has abruptly slowed but has not fallen into recession, and it even may be poised to pick up soon. “The worst economy that we’ll have is probably behind us or where we are at right now,” said Sung Won Sohn, chief economist of Wells Fargo & Co.

At the same time, based on the PPI report, “inflation may not be quite as dead as we thought it was,” said David Wyss, chief economist of Standard & Poor’s in New York.

Some analysts saw the combination of slowing growth and inflationary pressure as a sign the nation could be headed into stagflation, an ugly phenomenon last seen in the early 1980s. Slow growth amid rising prices is a difficult cycle to break because inflation is usually fought by raising interest rates whereas a slowdown is fought by cutting rates, as the Federal Reserve has been doing.

Friday’s news underscored a further deterioration in manufacturing, particularly in the auto industry. On top of that, Sohn said, “Consumers are scared stiff from hearing about layoffs and the possibility of recession. The only area really benefiting from lower interest rates is housing, and that’s why housing starts were up today.”

The most worrisome barometer was the producer price index. The 1.1% jump in the main PPI gauge, which tracks prices of finished goods, was the biggest increase since the 1.3% rise in September 1990. The index inched up only 0.2% in December.

Analysts said the latest report probably overstated the actual wholesale price increases. They noted that volatile food, tobacco and energy prices, along with the expiration of auto price incentives, accounted for most of the increase. The price of natural gas, which skyrocketed in January, has fallen sharply this month.

Still, there were other signs of potential trouble, particularly in the West. For instance, the report showed that cost of power for industrial users shot up 15% in the California-dominated Pacific region in January, versus only 3.2% nationally.

Analysts say energy costs are only a small component of most businesses’ expenses, particularly in California. Still, for some companies, particularly those battered by California’s current energy crisis, the cost increases sting.

El Monte-based Driftwood Dairy Corp., for example, has been hit by soaring natural gas and electricity bills, according to Jeep Dolan, vice president of sales and marketing.

But Dolan said it’s not just energy that is squeezing the dairy’s margins. The company that supplies Driftwood with plastic milk jugs just raised its prices, blaming a rise in its own energy and raw materials costs.

The result: Driftwood has had to raise the prices it charges retailers and food processors that purchase its milk and other products--a domino effect Dolan said will eventually make its way to consumers.

“You see it trickling through the whole manufacturing chain,” he said.

Paul L. Kasriel, head of economic research for Northern Trust Co., a Chicago-based bank, agreed with that general assessment. He said the energy-price increases reflected in the PPI report threaten both to fuel inflation and curb economic growth.

“The higher energy prices reflect a constraint on the economy’s ability to grow. California is the most glaring example, but this is not just a California story. It’s a national story,” he said.

More bad news came from the University of Michigan’s preliminary monthly release of its consumer sentiment index, which dropped 6.9 points to 87.8 in February, the lowest level since November 1993.

Still, while Fed Chairman Alan Greenspan said this month he is watching consumer sentiment closely, analysts said January’s strong retail sales suggest that consumers aren’t ready to quit spending.

Separately, industrial production fell 0.3% in January, somewhat more than expected, largely due to weak auto and truck manufacturing. Technology manufacturing remained strong, but the pace of its growth has slowed over the last three months.

A more upbeat report came in housing starts, which were up 5.3% in January. Analysts regarded the construction, which was concentrated in apartments and condominiums, as a sign that the economy remains out of recession. Still, they said the increase was boosted by relatively mild January weather in much of the country.

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Staff writer Marla Dickerson contributed to this report.

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Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

January: 141.6

Source: Bureau of Labor Statistics

Industrial Production

Index; 1992=100; seasonally adjusted:

January: 147.0

Source: Federal Reserve Board

Housing Starts

Seasonally adjusted annual rate, millions of units:

January: 1.65 million

Source: Commerce Department