Energy drives jump in inflation

Consumer prices rose 1.2 percent from Aug. to Sept.


WASHINGTON -- Hurricanes Katrina and Rita cut a swath of destruction through the national economy last month, with surging energy costs pushing consumer prices to their highest monthly rise in 25 years, the government said in a flurry of economic statistics yesterday.

Other data also weren't pretty, with industrial production dropping to its lowest level in 23 years and a measure of consumer confidence hitting a 13-year low. Retail sales also were relatively weak, and a measure of worker earnings took its worst drop in nearly a decade.

But stock markets shrugged off the news, in part because inflation outside of energy and food was relatively tame, suggesting that businesses have yet to significantly pass through higher energy costs to consumers.

And analysts said the economic impact of the hurricanes nationally would be shorter-lived than their physical devastation along the Gulf Coast. For example, oil prices are retreating after having been driven higher when the storms shut down much of the nation's refining capacity in the gulf region.

"All these statistics reflect the full force of the hurricanes on the broader economy, and we will probably have another month of ugly statistics," said Mark Zandi, chief economist at, an economic consulting firm.

On Wall Street, investors were relieved to see that inflation outside of energy remained well-behaved. The Dow Jones industrial average rose 70.75 points yesterday to close at 10,287.34.

As a result of the inflation spike, Social Security recipients will get a 4.1 percent cost-of-living adjustment in January, their biggest annual raise since 1991.

But Bill Novelli, chief executive of AARP, said that would be "eaten up by rising gasoline and heating costs, another double-digit increase in the monthly Medicare Part B premium and escalating health care bills."

The boost in Social Security benefits was driven in large measure by the Labor Department report yesterday that the consumer price index rose 1.2 percent in September, its biggest increase since March 1980.

Social Security checks for 48 million retirees are adjusted every January according to the consumer price index's performance in the four calendar quarters ending in the July-to-September period.

The ceiling on earnings subject to the Social Security payroll tax will increase from $90,000 this year to $94,200 in 2006.

But economists found last month's increase in consumer prices only slightly higher than their expectations.

A storm-driven 12 percent jump in energy costs was responsible for 90 percent of the increase, according to the Labor Department, and gasoline and home heating oil prices are retreating from post-hurricane peaks.

The "core" inflation rate, excluding the volatile food and energy sectors, edged up by only 0.1 percent, its fifth such monthly increase in a row.

Still, economists generally predicted the Federal Reserve would continue to raise its benchmark short-term interest rate at least for November and December.

The central bank's policy-making committee has nudged short-term rates up by a quarter of a percentage point at each of its last 11 meetings in an effort to head off inflation. The rate that banks charge each other for overnight loans stands at 3.75 percent, up from 1 percent in June 2004.

Economists credited the Fed with making the days of double-digit inflation a generation ago nothing more than what a team of Citigroup Global Markets analysts called a "chilling memory."

In a separate report, the Labor Department said average weekly earnings of production workers, after adjustment for inflation, fell by 1.2 percent in September, its steepest fall in nearly 10 years. For the 12 months ending in September, earnings fell 2.7 percentage points short of keeping up with inflation.

"We are in the midst of a protracted wage slump," said Jared Bernstein, a senior economist with the labor-backed Economic Policy Institute, "a troubling trend that is largely going unnoticed by policymakers."

In other reports yesterday, retail sales rose only 0.2 percent in September, reflecting a large decline in auto sales after the petering-out of huge discount pricing promotions over the summer.

Retail sales would have declined by 0.2 percent without a jump in gasoline sales that reflected prices that at one point soared above $3 per gallon.

Industrial production fell by 1.3 percent in September, the Fed reported, as hurricane-related shutdowns of Gulf Coast plants contributed to declines of 3.3 percent for chemicals and 6.4 percent for petroleum and coal products.

Job losses from the two storms now total 438,000, including an additional 75,000 hurricane-related claims filed last week.

But analysts said they believe hurricane-related claims have peaked and will begin declining in coming weeks.

Joel Havemann writes for the Los Angeles Times. The Associated Press contributed to this article.

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