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The Honolulu Advertiser
Posted on: Friday, December 14, 2007

Wholesale inflation surges on gas prices

By Martin Crutsinger
AP Economics Writer

WASHINGTON — A record jump in gasoline prices pushed up wholesale inflation in November at the fastest pace in more than three decades, while retail sales showed unexpected strength.

The Labor Department said yesterday that wholesale prices rose by 3.2 percent last month, the biggest increase in 34 years. The jump reflected a 34.8 percent surge in gasoline prices. Outside of energy and food, core inflation posted a 0.4 percent jump, double what was expected.

But in more upbeat economic news, the Commerce Department reported that retail sales increased by a better-than-expected 1.2 percent last month. It was the biggest sales advance in six months and evidence of widespread strength in a number of areas, from department stores to clothing shops and furniture stores.

On Wall Street, stocks posted a modest gain, rising by 44.06 points to close at 13,517.96.

Economists said the retail sales gain should ease concerns the economy is about to tumble into a recession, although they said overall growth in the current quarter is still likely to be weak given the headwinds battering consumers. Those troubles include the slump in housing, a severe credit crunch and surging energy costs.

All of these problems have pushed consumer confidence down to the lowest point in two years, leading economists to forecast a subpar performance by holiday shoppers this year.

The big jump in wholesale prices was worrisome, economists said, because it was not limited to energy. That suggests that the relentless surge in energy prices could be spreading into more widespread inflation, something that would raise alarm bells at the Federal Reserve.

"I think the Fed has some worries on inflation," said David Wyss, chief economist at Standard & Poor's in New York. "We are starting to see some leakage from energy into other areas of the economy."

White House press secretary Dana Perino said one bad report on inflation "doesn't make a trend."

"Inflation has remained remarkably low, even in the face of high energy prices," Perino said. "We're confident that Chairman (Ben) Bernanke takes price stability seriously and considers the risk of inflation in the Fed's policy decisions."

The Fed, struggling to get credit flowing again and to ward off a downturn, cut a key interest rate this week for the third time this year. The Fed also announced a global effort with other central banks to pump fresh cash into the banking system.

Wyss said the stronger-than-expected November retail sales performance would probably cause analysts to lift their forecasts for overall growth in the October-to-December quarter to slightly above 1 percent.

Many had trimmed those projections to less than 1 percent. They believed a slowdown in consumer spending, which accounts for two-thirds of total economic activity, and the continued drag from housing could push the country close to a recession.

"The retail sales report helps ease some of the worries about a recession, but it doesn't make them go away altogether," Wyss said. He said he still believed the maximum danger point for a downturn will occur in the first three months of next year.— their biggest increase in 34 years — after a steep rise in wholesale gasoline prices.

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