14-year high for wholesale price growth

WASHINGTON -- Wholesale prices -- catapulted by more expensive energy and food -- soared last month by the largest amount in more than 14 years.

With inflation at the producer level accelerating sharply after months of good behavior, chances are rising the Federal Reserve will boost interest rates for a fifth time this year on Dec. 14.

The Producer Price Index, which measures the costs of goods before they reach store shelves, jumped by 1.7 percent in October, compared with a tiny 0.1 percent in September, the Labor Department reported Tuesday. The increase was the largest since January 1990.

Wholesale gasoline and home heating oil prices were up by 17 percent for the month.

"A period of pretty tranquil inflation has passed -- with a vengeance," said economist Ken Mayland, president of ClearView Economics.

On Wall Street, the report helped to push stocks lower. The Dow Jones industrials lost 62.59 points to close at 10,487.65. It was the Dow's largest single-session drop since Oct. 22.

Wanting to make sure inflation doesn't become a threat to the economy, chairman Alan Greenspan and his Federal Reserve colleagues embarked on a campaign in June to raise short-term interest rates from what had been extraordinarily low levels to more normal ones.

Tuesday's price report reinforced Fed policy-makers' conviction that they need to raise rates "before anything bad happens," said Bill Cheney, chief economist at John Hancock Financial Services.

The Fed thus far has ordered four quarter-point rate increases. The most recent one, last week, left the federal funds rate -- the Fed's main tool for influencing economic activity -- at 2 percent.

In the PPI report, excluding energy and food costs, which can swing widely from month to month, core wholesale prices climbed in October by 0.3 percent for the second month in a row.

Economists had forecast a 0.6 percent increase in overall prices and a 0.1 percent increase for core prices.

The economy's soft patch in the spring and early summer had helped to keep wholesale prices relatively subdued, economists said. Now that the economy is picking up, inflation probably will be on the rise as well. A weaker U.S. dollar also is putting pressure on prices of imported goods, which gives U.S. producers more room to raise their prices.

Looking ahead, most economists don't foresee big spikes in wholesale prices like the one in October. Although energy prices are likely to remain high, crude oil costs have retreated from record highs. And food prices should calm down after the hurricane-related supply disruptions that contributed to October's big increase, analysts said.

"The recent spike ... should prove temporary," said a hopeful Mark Vitner, economist at Wachovia.

Still, economists were bracing for Wednesday's report on consumer prices for October. In light of the PPI figure, some raised their forecasts from a 0.4 percent rise to 0.5 percent, well above September's 0.2 percent.

From an economic point of view, inflation -- while clearly on the rise -- isn't currently a problem for the economy, analysts said.

Fed policy-makers, in a statement released after their meeting last week, said "inflation and longer-term inflation expectations remain well contained." They also said the economy appears to be growing "at a moderate pace despite the rise in energy prices."

In October, energy prices soared 6.8 percent, the biggest increase since February 2003, and a turnaround from the 0.9 percent dip registered in September.

Wholesale gasoline prices in October surged 17.3 percent, the largest increase since June 2000. Home heating oil costs skyrocketed 17.9 percent, the largest advance since February 2003. Liquefied petroleum gas, such as propane, jumped 14.7 percent, the biggest gain since January.

Oil prices, which hit a record high of just over $55 a barrel late last month, have moderated recently. Oil prices are hovering around $46 a barrel.

Food prices, meanwhile, jumped 1.6 percent in October, compared with a tiny 0.1 percent rise in September. October's increase, the most in a year, was led by soaring costs for vegetables. Prices for fruits, beef and veal, and pork also went up.

Elsewhere in the report: Prices for passenger cars dropped 1.3 percent and costs for heavy motor trucks declined 0.7 percent. But costs for construction machinery and equipment jumped 2.7 percent in October, the largest increase since January 1980.