Wholesale prices soared 2% in Nov., biggest rise in 32 years

December 20, 2006|By William Neikirk | William Neikirk,CHICAGO TRIBUNE

WASHINGTON -- Just when it appeared that inflation was under control, it showed its old stubborn self in a government report yesterday.

The Producer Price Index, which measures inflation at the wholesale level, rose 2 percent in November over October, the most in 32 years, the Labor Department said.

Higher prices for commodities, such as gasoline, and motor vehicles led the upward push. The rise was four times higher than financial markets expected and may have been an aberration.

While many analysts said the rate of wholesale inflation likely would subside in the months ahead, it served as a warning that keeping the lid on rising prices could be more troublesome than widely believed.

The Federal Reserve isn't likely to be in a hurry to reduce interest rates with data like the latest numbers. Many economists had expected interest rate reductions as early as the first quarter of 2007. Now, that outlook seems optimistic, economists said.

"Inflation wasn't quite as dead as we thought it was," said David Wyss, chief economist at Standard & Poor's, the credit-rating company.

"One month doesn't make a trend, but if it doesn't go away next month [with December's report] the Fed is going to get worried," he added.

The central bank has demonstrated that it will not tolerate the slightest outbreak of inflation, and will continue to hold interest rates high as long as there is the slightest hint that the overall price level could get uncomfortably high.

Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, said he does not expect the central bank to cut interest rates in 2007.

Energy prices could be especially problematic, given Middle East strife and possible trouble with suppliers from other countries, such as Russia and Venezuela, he said.

"I'm thinking things won't break that well for energy," he said. "We are going to have to watch energy very closely."

In November, gasoline prices at the wholesale level surged 17.9 percent, the largest in more than six years. Big price increases also were posted for natural gas, home heating oil and diesel fuel. These increases were in contrast to energy price declines in September and October before the Nov. 7 election.

Oil prices surged to $75 a barrel in August, but then began a slide to $56 a barrel before rising again.

Economists Brian S. Wesbury, Robert S. Stein and Trevor D. Scott wrote in an analysis for First Trust Portfolios LLP in Lisle, Ill., that the "core" inflation rate, excluding food and energy, went up 1.3 percent in November, the largest rise since 1980.

This core rate, watched closely by the central bank as an inflation indicator, is now up 1.8 percent over last year, they said.

The new data "show inflation is too alive and too well for the Federal Reserve to be complacent. It supports our belief that inflation pressures are likely to move higher over the course of 2007," the economists wrote.

But Joel L. Naroff, an economic consultant in Holland, Pa., said the report did not accurately reflect the rate of inflation. He noted a rebound in prices for light trucks, up a record 13.7 percent, and new car prices, up 2.2 percent. With vehicle sales soft, he said, these price rises are likely to be reversed.

"When you look at the things that people typically buy, all these categories are in good shape," Naroff said. At the same time, he agreed that the report was "a reminder that inflation's not going away and that energy cost pressures are still out there."

But Paul L. Kasriel, economist at Northern Trust Co. in Chicago, said he wasn't greatly concerned about inflation.

"At the consumer goods level, Circuit City's disappointing latest quarterly earnings report suggest that there might be a whiff of deflation in the air," he wrote in a report. "From flat-screen TVs to the McMansions to watch them in, prices are falling absolutely."

The Commerce Department reported yesterday that housing construction rose 6.7 percent to a seasonally adjusted annual rate of 1.588 million units. But analysts said the number was misleading and not an indication that the housing slump was ending.

They noted that the rebound followed an even bigger 13.7 percent drop in October. Even with the November gain, housing construction was 25.5 percent below the level of a year ago. And applications for building permits, considered a good indication of future construction activity, fell for a 10th consecutive month.

William Neikirk writes for the Chicago Tribune.

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