Inflation increases, consumer outlook weakens

Martin Crutsinger

Friday, March 14, 2003 | 9:51 a.m.

WASHINGTON -- Inflation at the wholesale level shot up 1 percent in February as energy prices soared by the largest amount since the last Persian Gulf War while industrial production managed to eke out a tiny gain.

The Federal Reserve said today that output at the nation's factories, mines and utilities rose by a small 0.1 percent last month, following a much better 0.8 percent increase in January.

Manufacturing, the sector of the economy hardest hit by the 2001 recession, saw production fall by a tiny 0.1 percent last month. But this weakness was offset by a surge of 1.3 percent in production at utility companies, reflecting the severe winter weather in much of the country, and a 1 percent rise in output in the mining sector, a category that includes oil production.

The Labor Department said that last month's spurt in the Producer Price Index, which measures price pressures before they reach the consumer, followed an even bigger 1.6 percent jump in January, which had been the sharpest one-month increase in 13 years.

The inflation pressures in both months stemmed largely from big increases in energy prices, which climbed by 4.8 percent in January and an even sharper 7.4 percent in February, the biggest one-month jump since November 1990 as the United States was massing forces in the Middle East to repel Iraq's invasion of Kuwait.

Continuing uncertainty about what might happen if the United States invades Iraq also took a toll on consumer confidence in early March, with the University of Michigan's preliminary report for March indicating that consumer sentiment fell to 75.0 from 79.9 in February.

The PPI report showed that beyond energy prices, inflation was well-contained last month. The core rate, which excludes energy and food, actually fell by 0.5 percent, the third monthly decrease in the past four months.

In other economic news today, the Commerce Department reported that the nation's current account trade deficit rose to a record $503.4 billion for all of 2002 including a record deficit in the fourth quarter of $136.9 billion.

The current account is the broadest measure of trade because it tracks not only the flow of merchandise and services contained in the monthly trade report but also investment flows.

The Commerce Department also reported today that business inventories climbed for a ninth straight month in January, rising by 0.2 percent, but the pace of inventory building slowed, suggesting that companies are growing more cautious about restocking, given the soft patch the economy has hit.

The absence of serious inflation pressures has allowed the Federal Reserve to keep interest rates at a 41-year low. Many economists say there is a possibility the Fed will cut rates again when it meets on Tuesday, to ward off a growing threat that the weak recovery will stall out altogether, pushing the country into a new recession.

That view has taken hold given a string of weak economic reports in recent weeks including a report showing that 308,000 jobs were eliminated last month, the biggest wave of layoffs since the period right after the Sept. 11, 2001, terrorist attacks.

Robert Gay, chief research economist for Commerzbank in New York, said he was concerned that all the weakness could push the overall economy back into recession this spring.

"My enthusiasm for the economy is waning," said Gay. "We are halfway through March and things don't look like they are getting better."

The 7.4 percent rise in energy prices last month reflected an 18.8 percent jump in gasoline prices, the biggest one-month rise since a 25 percent increase in April 1999. Home heating oil prices were up 25.2 percent while the energy category that contains propane and butane, used by many people to heat their homes, jumped by 25.2 percent.

Energy prices have continued to rise this month with a nationwide survey of service stations showing prices up by a nickel in the past two weeks, to a near-record high of $1.75 per gallon.,

Analysts are forecasting that if the United States does invade Iraq and the war is over quickly with minimum damage to oil fields, energy prices should quickly retreat, just as they did after America's first Persian Gulf War in early 1991.

Food prices at the wholesale level rose by 0.6 percent last month following an even bigger 1.6 percent increase in January. The price pressures in February reflected a jump of 6.6 percent in chicken prices, the biggest increase since February 1990 and a 3 percent rise in fruit prices, the largest gain since last October.

Outside of the volatile energy and food categories, the so-called core rate of inflation actually fell by 0.5 percent last month after a big 0.9 percent increase in January.

The big jump in core inflation in January had been considered a fluke by many economists, reflecting a misleading reading on car and truck prices, which showed a big jump in January. However, the February report showed the price of passenger cars at the wholesale level falling by 0.6 percent with light truck prices declining by an even bigger 3.9 percent.