Producer price inflation at 15-year high

By Tim Ahmann

WASHINGTON (Reuters) – U.S. producer prices shot up by an
unexpectedly large 1.9 percent last month, the biggest gain in
more than 15 years, as energy costs surged in the wake of
hurricanes that devastated the U.S. Gulf Coast, a government
report showed on Tuesday.

However, outside of volatile food and energy costs, prices
received by farms, factories and refineries rose a relatively
subdued 0.3 percent, the Labor Department said.

Separately, the Treasury Department said net flows of
capital into U.S. assets swelled to $91.3 billion in August. It
was the largest inflow in 16 months and suggested the United
States was having little trouble finding the overseas capital
it needs to balance its books.

Stock prices fell on the producer price report, which kept
alive concerns over inflation and profit pressures, and the
likelihood of further interest-rate hikes from the Federal
Reserve. Bond prices initially slipped but then moved higher.

The dollar strengthened on both the signs of price pressure
and evidence of strong foreign demand for U.S. securities.

Wall Street economists had expected producer prices to rise
just 1.1 percent, with prices outside of food and energy up a
tame 0.2 percent.

Analysts were divided on the degree to which the higher
costs producers face from energy prices would feed through to
the prices consumers pay.

Energy prices at the producer level soared 7.1 percent in
September, the biggest jump since October 1990, while food
prices gained 1.4 percent, the largest rise in nearly a year.

“The real question is whether companies will squeeze their
(profit) margins as costs increase or if they are going to
increase prices,” said Michael Metz, chief investment
strategist at Oppenheimer Holdings Inc. in New York. “I think
they will increase prices.”

INFLATION FIGHT

Fed officials, who have raised overnight borrowing costs
from a 1958 low of 1 percent to 3.75 percent in 11 straight
quarter-point steps, are widely expected to bump rates up again
when they meet in two weeks in an effort to ensure sharp energy
price gains do not feed into more broad-based inflation.

Over the past year, producer prices have increased a hefty
6.9 percent on the back of rising energy costs, the biggest
12-month gain since the period ended November 1990. In
contrast, so-called core prices have gained just 2.6 percent.

Consumer prices have also jumped. They posted a 4.7 percent
gain in the 12 months through September, the biggest jump since
1991. But core retail prices are up just 2 percent.

Mounting energy costs have been the inflation culprit.

U.S. crude oil prices hit a record high of $70.85 a barrel
in the aftermath of Hurricane Katrina, which slammed into the
Gulf Coast on August 29. Hurricane Rita in late September kept
prices elevated and much of the region’s oil-producing and
refining facilities shuttered.

But prices have drifted lower this month. In mid-morning
trade, crude prices were hovering under $64 a barrel.

Gasoline prices at the producer level increased 12.7
percent last month, natural gas costs climbed 9 percent,
liquefied petroleum gas prices soared 24.7 percent and home
heating oil prices rose 4.8 percent, the department said.

Prices for cars rose 0.9 percent in September and prices
for light trucks and SUVs gained 0.5 percent as automakers
wound down special sales incentives.

Fed Chairman Alan Greenspan said on Monday that while
surging energy prices would weigh on growth and foster
inflation pressure, it was unlikely to have an impact anywhere
near as great as the oil price shocks in the 1970s.

So far, U.S. consumers have appeared resilient in the face
of higher energy costs and retail sales appear to be getting a
boost this month as cooler weather boosts apparel purchases.

The International Council of Shopping Centers and UBS said
in a report on Tuesday that U.S. chain store sales rose 0.4
percent in the week ended October 15, the fourth straight gain.

Separately, Redbook Research said chain store sales so far
in October have risen 1 percent compared with the same period
last month and were up 3.7 percent from year-ago levels.

(Additional reporting by Laura MacInnis in Washington and
Chris Arena in New York)