Energy, Food Drive Up Wholesale Prices

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The New York Sun

WASHINGTON – Propelled by sharply higher energy and food costs, wholesale prices soared by 1.7% in October, the largest increase since early 1990.


The Producer Price Index measures costs of goods before they reach store shelves. The big over-the-month jump came after wholesale prices edged up just 0.1% in September, the Labor Department reported yesterday. Concerns about inflation have driven the Federal Reserve’s credit-tightening policies of recent months.


The report suggested that inflation at the wholesale level is picking up after months of being quite well-behaved.


“Inflation is not a problem, but a corner has been turned,” said the president of Clear View Economics, Ken Mayland. “We face a period of still low, but building inflation pressures, which the Fed has plenty of time to nip in the bud.”


The economy’s soft patch in the spring and early summer helped to keep wholesale prices relatively subdued, Mr. Mayland explained. Now that the economy is gaining traction, inflation probably will be on the rise as well, he said.


Excluding energy and food costs, which can swing widely from month to month, “core” wholesale prices climbed in October by 0.3% for the second month in a row.


The PPI figures showed larger gains than economists were expecting. They were forecasting overall wholesale prices to go up by 0.6% in October and core prices to edge up by 0.1 point.


On Wall Street, the higher-than-expected reading on the PPI helped to push stocks lower. The Dow Jones industrials lost 59 points and the Nasdaq was off 16 points in morning trading.


The 1.7% increase in the overall PPI was the largest advance since January 1990.


From an economic point of view, inflation – while clearly on the rise – isn’t currently a threat to the economy, analysts said.


The Federal Reserve’s chairman, Alan Greenspan, and his Fed colleagues, in a statement after their meeting last week, said that the economy ap pears to be growing “at a moderate pace despite the rise in energy prices.”


Even with the surge of energy prices, Fed policy-makers said “inflation and longer-term inflation expectations remain well contained.”


Against that backdrop, Fed policymakers said last week that they can stick with their gradual approach to raising short-term interest rates.


The Fed decided last week to boost a key short-term rate by one-quarter percentage point to 2%, its fourth rate increase this year. The Fed is pushing up rates now to prevent inflation from being a problem in the future.


A growing number of economists believe the Fed will increase rates again at its next meeting on December 14. Yesterday’s wholesale prices figures would justify such a move, they said.


In October, energy prices soared by 6.8%, the biggest increase since February 2003, and a big turnaround from the 0.9% dip registered in September.


Gasoline prices in October surged by 17.3%, the largest increase since June 2000. Home heating oil costs skyrocketed by 17.9%, the largest advance since February 2003. Liquefied petroleum gas, such as propane, jumped 14.7%, the biggest gain since January.


Oil prices, which hit a record high of just over $55 a barrel late last month, have retreated recently. Oil prices are hovering at more than $46 a barrel.


Food prices, meanwhile, jumped by 1.6% in October, compared with a tiny 0.1% rise in September. October’s increase, the most in a year, was led by soaring costs for vegetables. Prices for fruits, beef and veal, and pork also went up.


Economists believe that the rise in food prices reflected supply disruptions related to hurricanes that had ripped through Florida and the southeast.


Elsewhere in the report: prices for passenger cars dropped by 1.3% and costs for heavy motor trucks declined by 0.7%. But costs for construction machinery and equipment jumped by 2.7% in October, the largest increase since January 1980.


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