High Cost of Gasoline Drives Up Prices

Soaring gasoline prices pushed U.S. consumer prices ahead swiftly last month, but outside of energy, prices barely budged, the government said Thursday.

Two Federal Reserve Bank reports on regional manufacturing activity in September, however, showed many businesses reported rising cost pressures.

Another report showed that Hurricane Katrina had led to the biggest jump in initial claims for jobless aid in nearly 10 years.

The consumer price index jumped 0.5% in August, but the core index, which strips out volatile food and energy costs, moved up just 0.1%, the Labor Department said.

The benign core inflation reading was the latest sign that lofty energy prices, at least through August, had not yet spilled into other areas. But gasoline prices shot up to record highs after Katrina and economists warned that a higher inflation rate might lie ahead.

Indeed, two regional factory surveys Thursday provided early glimpses of how the U.S. economy was faring in Katrina’s wake.

The New York Federal Reserve said its index of New York state factory activity fell to 16.97 this month from August’s 23.04. The Philadelphia Fed’s index of mid-Atlantic factory activity plunged to 2.2 from August’s 17.5.

In addition, both Fed branches said indexes of price pressures at the manufacturing level rose sharply in September from August.

The Philadelphia Fed said its prices-paid index leaped to 52.7 from 25.9 in August, the biggest increase since 1973.

The reports raised the likelihood that Fed policymakers, wary of higher inflation, would continue to tighten credit, many analysts said. The next Fed meeting is Tuesday.

A Reuters survey of economists found that a clear majority expected the Fed to boost its benchmark short-term interest rate from 3.5% to 3.75%.

Sixteen of the 21 economists said they anticipated another quarter-percentage-point hike; five predicted that there would be no increase.

“Overall, the damage from the hurricane on the economy is limited, and by November and December we will start seeing the positive effect on production from rebuilding,” said Michael Englund, chief economist at Action Economics.

Lofty energy prices were already eating into consumers’ wallets before Katrina, with energy costs up 5% in August. Over the last year, inflation-adjusted earnings fell 1.1%, largely because of costlier energy.

Gasoline prices climbed 8.3% in August, the biggest gain since February 2003, and are likely to move up again this month. Prices at the pump hit a record $3.07 a gallon in the immediate aftermath of the storm.

In a sign of the storm’s human toll, first-time claims for state unemployment aid shot up 71,000 last week, the government said. It was the biggest jump since blizzards hit the Eastern Seaboard in January 1996.

The increase took initial claims up to 398,000 in the week ended Sept. 10, the highest level in two years.

The Labor Department estimated that 68,000 of the new claims were caused by Katrina. But it cautioned that it was unable to process the huge surge in filings that came as state workers waded into evacuee shelters to log applications.

Also Thursday, the Mortgage Bankers Assn. said the mortgage delinquency rate edged up to 4.34% in the second quarter from 4.31% in the first quarter, and that the rate is likely to increase further in the aftermath of Katrina.

Bloomberg News was used in compiling this report.