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Oil's Cost Slick Spreading: Crude Sets a Fresh Record; Consumer Price Index Jumps

Posted on: Thursday, 20 April 2006, 09:00 CDT

By Mark Skertic, Chicago Tribune

Apr. 20--The price of oil continued its record-setting climb Wednesday, at a time when new government reports show prices in other sectors of the economy are rising partly due to higher energy costs.

The Labor Department said Wednesday that its consumer price index rose by 0.4 percent last month, up sharply from the 0.1 percent gain in February. The extra price pressures were led by a big jump in gasoline prices.

The core consumer index, a measure that does not include energy or food prices, grew 0.3 percent last month, the largest single-month jump in a year. Clothing costs were up 1 percent, hotel rates jumped 0.8 percent, and rental prices rose 0.4 percent. That index also reflected increases in ticket prices that airlines imposed to try to cope with rising fuel prices.

Light sweet crude for May delivery closed at $72.17 in trading on the New York Mercantile Exchange, up 82 cents from the previous day. Trading had reached as high as $72.40 a barrel Wednesday.

On Wall Street, stock prices closed higher Wednesday, the day after a huge market rally. Investors reacted to indications that the Federal Reserve Board will stop raising interest rates in hopes of holding off inflation.

The Federal Reserve likely is expecting consumers to make spending choices, staying away from some purchases as prices climb too high, said Diane Swonk, chief economist at Mesirow Financial in Chicago.

"They expect a slowdown," Swonk said. "It's if the economy doesn't slow, if consumers don't make those trade-offs in the choices that they make, that the Fed will keep tightening" the economy with higher interest rates, she said.

One airline leader on Wednesday predicted price hikes on everything from fares to curbside check-in to food.

"Ultimately, the consumer has to pay for this," said American Airlines Chief Executive Gerard Arpey.

American on Wednesday reported a first-quarter loss of $92 million, an improvement from the year-earlier quarter's loss of $162 million. That gap was partially closed, Arpey said, by charging for services and raising ticket prices.

"We're obviously going to keep pushing this line as much as we can," he said in response to a question from a financial analyst about revenues.

Arpey declined to say what rising fuel prices would mean for the Ft. Worth-based airline's hopes for returning to profitability this year. The carrier has fuel hedges that provide some protection from higher prices. Twenty-three percent of its anticipated fuel needs for the last nine months of the year are locked in at $61 a barrel oil.

United Airlines left bankruptcy in February with a recovery plan based on oil at $50 a barrel. The Elk Grove Township-based carrier, which wasn't able to hedge much of its fuel needs when it was in bankruptcy, has not released financial results post-bankruptcy.

Carriers that have fuel hedges in place have given themselves some protection, said airline analyst John Pincavage. Despite high fuel prices, the relatively strong economy has allowed carriers to "slip price increases in," he said. "And traffic has been good, so the combination means they've had decent revenue."

But those revenue increases have not been enough to allow most carriers to show a profit.

"The shame of this is all these carriers, with or without bankruptcy, are more efficient than they were, more cost effective, lower unit costs excluding fuel, than they ever have in their histories," Pincavage said.

"Unfortunately, fuel is a big part of their expenses. It's erased all the progress they've made."

mskertic@tribune.com

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Copyright (c) 2006, Chicago Tribune

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Source: Chicago Tribune

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