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Big Gains in Cost of Energy, New Cars and Tobacco Leads Inflation Rate at the Wholesale Level

October 10, 1997

Big Gains in Cost of Energy, New Cars and Tobacco Leads Inflation Rate at the Wholesale Level To Jump Half a Percent in SeptemberBy MARTIN CRUTSINGER

WASHINGTON (AP) _ Inflation at the wholesale level, led by big gains in the cost of energy, new cars and tobacco, climbed an unexpectedly high 0.5 percent last month.

The Labor Department said today that the September gain in its Producer Price Index, which measures cost pressures before they reach the consumer, was the biggest increase this year and followed a 0.3 percent rise in August.

The gain was more than double what investors had been expected and the initial reaction was negative on Wall Street. The yield on Treasury’s benchmark 30-year bond, which moves in the opposite direction of prices, jumped to 6.43 percent but stocks were down just 20 points at noon.

Economists cautioned against an overreaction to the wholesale price report, arguing that energy prices have already begun to moderate and the spike in auto and tobacco costs reflected temporary factors.

``This is not the leading edge of a new inflation problem,″ said Cynthia Latta, economist at Standard & Poor’s DRI in Lexington, Mass. ``It was mainly tobacco and cars.″

Financial markets had been put on a renewed inflation alert on Wednesday when Federal Reserve Chairman Alan Greenspan shook up investors by saying that economic good times behind the current bull market could falter.

On Thursday, Germany’s central bank, reflecting its own concerns about higher inflationary pressures, raised German interest rates for the first time in five years, triggering similar rate increases across Europe.

In a separate report today showing plentiful food supplies, the Agriculture Department raised its estimate of the nation’s corn harvest to 9.31 billion bushels, the third-largest crop in history.

The September increase in wholesale prices reflected a big 1.5 percent jump in energy prices, the biggest monthly gain since December, while food prices were up a modest 0.1 percent.

But even excluding the volatile food and energy sectors, the so-called core rate of inflation was up 0.4 percent, the worst showing since November 1995. Most of the price pressures last month came in higher costs for new cars and tobacco.

Greenspan’s comments this week represented a change from his generally optimistic summertime assessment of the current economic expansion, now in its seventh year with inflation at the lowest levels in three decades.

Greenspan warned that the economy’s rapid growth and heavy demand for workers were unsustainable and inflation continued to be the greatest threat to ending the current recovery.

While the Fed has left interest rates unchanged since a small upward nudge in March, many economists believe the central bank is poised to start tightening credit further at the first whiff of inflation.

Wholesale prices so far this year are still falling at an annual rate of 1.4 percent because the August and September gains followed seven straight declines from January through July, something that had never occurred since the government first began measuring wholesale inflation in 1947.

The small rise in food costs in September, which followed a 0.3 percent August increase, reflected price declines for beef, pork and poultry that helped offset a 2.7 percent rise in the cost of fish and an even sharper 13.7 percent jump in fresh fruit prices.

The biggest gain in fruit prices since last September reflected a 46.7 percent surge in the cost of strawberries, a 33.7 percent jump in red delicious apples, a 29 percent jump in the price of avocados and a 16 percent spike in grape prices.

The higher energy costs came from a 2.2 percent surge in gasoline costs and a 1.2 percent rise in residential natural gas at the wholesale level.

The 1.4 percent jump in new car prices was the biggest since October 1994.

The 0.5 percent increase in overall wholesale prices was the biggest since a similar 0.5 percent rise last December. That increase had been the biggest since a 0.6 percent jump in December 1995.

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