- The Washington Times - Tuesday, September 13, 2005

Surging costs for gasoline and other energy products fueled inflation at the wholesale level in August, pressure that is expected to become even more intense when the full effect of Hurricane Katrina is felt.

The Labor Department said its Producer Price Index, which measures inflation before it reaches the consumer, jumped a sharp 0.6 percent in August following an even bigger 1 percent increase in July.

In other economic news, the Commerce Department reported that oil imports reached an all-time high in July and the trade gap with China also set a record. However, the overall trade deficit improved slightly to $57.9 billion as exports rose and imports outside of energy fell.

The PPI report showed that energy prices jumped 3.7 percent in August, led by a 9.5 percent rise in gasoline costs. Natural gas for home use was up 2.5 percent. The energy increases captured in the PPI report occurred before Katrina battered the Gulf Coast, sharply reducing production.

Energy Secretary Samuel W. Bodman and other administration officials touring Gulf Coast energy facilities yesterday expressed concern about potential shortages of natural gas in coming months because the region’s production may not recover for months.

Last week, the Energy Information Administration predicted that natural gas prices could soar this winter, including increases of as much as 71 percent in the Midwest, because of the hurricane.

The PPI report showed that aside from energy and food, the so-called “core” rate of inflation showed no increase at all in August, after a 0.4 percent rise in July and a 0.1 percent drop in June.

While rising energy have not yet spilled over into more widespread inflation problems, economists said Katrina is likely to disrupt the benign overall inflation performance.

“Pressure to bump prices up, or levy temporary freight surcharges, will become more intense in September,” said Brian Bethune, U.S. economist at Global Insight, a private forecasting firm in Lexington, Mass.

The pre-Katrina inflation reading contained in the PPI showed price pressures were absent outside of energy. Food costs fell by 0.3 percent in July, the fifth consecutive monthly decline, as the price of fruit, eggs and beef all declined. About half of the downward pressure on prices outside of energy in August reflected a 1.3 percent drop in the cost of new passenger cars, the second decline in the past three months.

Analysts are split on whether the Federal Reserve will again raise interest rates at its meeting next week. Some suggest that the Fed may pause to give policy-makers time to assess how much of a jolt the economy will receive from Katrina. Other economists believe the Fed will deliver an 11th quarter-point rate increase out of concern that the higher interest rates are needed to combat rising inflation pressures.

The trade report showed a 2.6 percent improvement over a revised June imbalance of $59.5 billion, which was the second-highest deficit in history. The deficit this year is running at an annual rate of $693.1 billion, 12 percent higher than last year’s record of $617.6 billion.

The deficit with China increased by 0.3 percent to a new high of $17.7 billion and is running at an annual rate 29 percent above the same period last year, when the deficit reached a record $162 billion. This year’s widening deficit reflects a 55.2 percent surge thus far this year in Chinese imports of clothing and textiles since global quotas were lifted Jan. 1.

With oil prices soaring briefly above $69 per barrel after Katrina struck, analysts believe that America’s foreign oil bill will surpass the July record, adding further pressure on the overall deficit.

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