Wsj 10/20 Presentations

The Economy

Consumer Prices Jump 1.2% on Rising Energy Costs

By Joi Preciphs

717 words

15 October 2005

The Wall Street Journal

A2

English

(Copyright (c) 2005, Dow Jones & Company, Inc.)

Rising energy costs pushed consumer prices up 1.2% in September, the fastest acceleration in more than 25 years, and led consumers to spend more on gasoline and less on cars, the government said.

But a slew of reports on the economy Friday also showed that energy price increases aren't -- yet -- boosting prices of other goods and services, and consumer spending on items other than cars and energy rose in September.

Separately, the Federal Reserve reported that industrial production dropped a sharp 1.3% in September, largely because of disruptions triggered by hurricanes Katrina and Rita and a strike at Boeing Co.

The stock market held on to earlier gains Friday as investors apparently found solace in the fact that core inflation -- which excludes food and energy -- rose a tame 0.1% in September.

That overall 1.2% increase in the Consumer Price Index is likely to prompt Federal Reserve policy makers to continue raising interest rates in the coming months. The Labor Department attributed 90% of the rise to a record 12% jump in energy prices in September -- the third consecutive month of energy price increases.

Gasoline prices rose 17.9% in September from August, and natural-gas prices climbed 12.1%, generating concern that consumers will curb their spending on other items. But while gasoline prices shot up, sales at the pump grew only 4% in September, according to the Commerce Department, indicating consumers made a major effort to conserve.

Meanwhile, General Motors, Ford and DaimlerChrysler registered sales declines of more than 30% through the first nine selling days of October, compared with October 2004.

The modest increases in core prices -- with the 0.1% rise in September and only 2% over the past 12 months -- have cheered many economists, but few expect it to continue. "If there were going be immediate pass through, it would show up here," said economist Kathleen M. Camilli, president, Camilli Economics in New York City. "But I'm not saying that it won't show up" eventually.

Ms. Camilli and a few other economists said that while the core inflation number is significant, it's not the most important. "We're much more concerned about the adverse impact of rising energy prices on consumer behavior and spending across income classes rather than on consumer price inflation," Ms. Camilli told her clients earlier this week.

Retail sales in September rose 0.2%, adjusted for inflation, after falling 1.9% in August, the Commerce Department said. The report showed that consumers spent 4% more on gasoline than in August, and 34.8% more than a year ago. While automobile dealerships saw slower traffic, strong sales were reported at health-and-personal-care stores and building material and garden stores.

One worrisome sign: Average weekly earnings for manufacturing jobs and nonmanagerial service occupations, adjusted for inflation, fell 1.2% in September from August, the Labor Department said.

"Though faster inflation made for larger wage losses in September, this is a continuation of a persistent pattern," said Jared Bernstein, an economist with the Washington-based Economic Policy Institute. He noted that hourly earnings were down in 15 out of the past 17 months, and warned: "We are in the midst of a protracted wage slump, a troubling trend that is largely going unrecognized by policy makers."

With rising gas prices, consumer sentiment tumbled last month, new surveys from the University of Michigan showed. The university's Index of Consumer Sentiment fell to 76.9 in September, from 89.1 in August, and its Index of Consumer Expectations dropped to 63.3 from 76.9. The declines are the largest in more than 12 years, the report said.

Consumers also anticipated an inflation rate of 4.3% for the next 12 months, up substantially from 3.1% in August and the highest level since 1990. The report also said that more than a third of all consumers reported their financial situations had worsened, with a fourth of all households pointing to higher prices as the main reason.

Gas prices had a "devastating impact on consumers' budgets" and "caused consumers to expect a worsening financial situation during the years ahead," said Richard Curtin, director of the University of Michigan surveys.