Producer Price Index Surges 1.7% in October

Wholesale prices rose in October at their fastest clip in nearly 15 years, the Labor Department reported Tuesday, raising concerns that businesses might finally be gaining the power to pass along increases to consumers.

Paced by soaring food and energy inflation, the producer price index -- which measures the cost of goods before they reach store shelves -- moved up 1.7% last month. That was nearly three times the 0.6% increase expected by economists and the largest jump since January 1990.

The index rose 0.1% in September.

The core rate -- excluding volatile energy and food prices -- climbed 0.3% in October, also much more than the 0.1% that was expected.

The size and scope of the PPI increase sparked worries about whether swelling producer prices would soon translate into higher consumer inflation. That could push up interest rates and possibly throttle an economic recovery that is beginning to regain steam.

In fact, the PPI jump boosted the likelihood that the Federal Reserve would raise its benchmark short-term interest rate another quarter-point, to 2.25%, at its next policy meeting Dec. 14, economists said.

That prospect didn’t thrill investors, as stocks staged their first broad decline in three weeks while bond yields rose.

The consumer price index for October will be released today.

Wholesale price increases haven’t always translated into consumer price rises, particularly when consumer spending and hiring conditions are soft, as was the case in the spring and early summer.

But the recent strengthening of the job market and faster overall economic growth could finally be giving pricing power to businesses, although it may not show up immediately in the consumer price index, said Haseeb Ahmed, senior economist at Economy.com in West Chester, Pa.

“This could be the real thing” in sparking more consumer inflation, he said.

In October, virtually every corner of the economy saw producer prices rise. Food prices gained 1.6%, with fresh fruit prices jumping 11.3% and vegetable prices surging 34.2%. Energy costs rose 6.8%, the biggest gain since February 2003, with gasoline leaping 17.3%. Capital equipment rose 0.4%. Iron and steel scrap went up 15.4%.

Economists cautioned that many of those increases might be short-lived. The surges in fresh fruit and vegetable prices were related to crop damage caused by the Florida hurricanes. And gasoline prices have already begun to fall, as crude oil has slipped back below $50 a barrel.

The PPI report “greatly overstates the inflation pressure we have,” said Steven Wood, chief economist at Insight Economics in Danville, Calif.

Businesses in some industries are gaining pricing power, as reflected in their latest earnings reports. These include commodity-based companies, which are enjoying robust demand for everything from coal to steel, and distribution companies, which are facing transportation bottlenecks and capacity shortages, Wood said.

But retailers, airlines and other industries “aren’t going to enjoy as much pricing power because of competitive pressures that still exist,” Wood said.

Economists also noted that wage increases were still modest amid continuing productivity gains and a slack job market. That has eased inflationary pressures on businesses.

Overall, producer prices have risen at a 5.2% annualized rate this year, versus a 4% increase for all of 2003.