- The Washington Times - Tuesday, November 16, 2004


Wholesale costs — catapulted by more expensive energy and food — soared last month by the largest amount in more than 14 years.

With inflation at the producer level accelerating sharply after months of being quite well-behaved, chances are rising that on Dec. 14, the Federal Reserve Board will boost interest rates for a fifth time this year.

The Producer Price Index (PPI), which measures the costs of goods before they reach store shelves, jumped by 1.7 percent in October, compared with a tiny 0.1 percent in September, the Labor Department reported yesterday. The increase was the largest since January 1990.

Wholesale gasoline and home heating oil prices were up by 17 percent for the month.

“A period of pretty tranquil inflation has passed — with a vengeance,” said economist Ken Mayland, president of ClearView Economics.

Wanting to make sure inflation doesn’t become a threat to the economy, Chairman Alan Greenspan and his Federal Reserve colleagues embarked on a campaign in June to raise short-term interest rates from what had been extraordinarily low levels to more normal ones.

Yesterday’s price report reinforced Fed policy-makers’ conviction about raising rates “before anything bad happens,” said Bill Cheney, chief economist at John Hancock Financial Services.

The Fed thus far has ordered four quarter-point rate increases. The most recent one, last week, left the federal funds rate, the Fed’s main tool for influencing economic activity, at 2 percent.

In the PPI report, excluding energy and food costs, which can swing widely from month to month, core wholesale prices climbed in October by 0.3 percent for the second consecutive month .

Economists had forecast a 0.6 percent increase in overall prices and a 0.1 percent increase for core prices.

The economy’s soft patch in the spring and early summer had helped to keep wholesale prices relatively subdued, economists said. Now that the economy is picking up, inflation probably will be on the rise as well. A weaker U.S. dollar also is putting pressure on prices of imported goods, which gives U.S. producers more room to raise their prices.

Looking ahead, most economists don’t foresee big spikes in wholesale prices such as the one in October.

Although energy prices are likely to remain high, crude oil costs have retreated from record highs. And food prices should calm down after the hurricane-related supply disruptions that contributed to October’s big increase, analysts said.

“The recent spike … should prove temporary,” said a hopeful Mark Vitner, economist at Wachovia.

Still, economists were bracing for today’s report on consumer prices for October. In light of the PPI figure, some raised their forecasts from a 0.4 percent rise to 0.5 percent, well above September’s 0.2 percent.

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