NEW YORK (CNN/Money) -
Prices paid by consumers in October increased at a slightly faster pace than Wall Street expected, although it did not show the very high spike shown in wholesale prices in an earlier report.
The Labor Department's Consumer Price Index, the government's main measure of inflation released Wednesday, rose 0.6 percent in October, compared with a 0.2 percent rise in September. Economists surveyed by Briefing.com forecast a 0.4 percent rise.
Energy prices were the key factor in the price rise, as retail consumer prices were up 4.2 percent in the month that saw oil futures reach record levels. Gasoline prices rose 8.6 percent during the month and heating oil was up 8.1 percent.
But both of those gains were less than half of the increases shown in wholesale prices for those items in Tuesday's Producer Price Index report.
Food also posted a 0.6 percent increase, the biggest jump since May, as hurricanes that hit the Southeast United States drove fruits and vegetables prices up by 6.0 percent.
But the so-called core CPI, which excludes often volatile food and energy prices, gained 0.2 percent after a 0.3 percent rise in September. Economists had a consensus estimate of a 0.1 percent rise in core CPI.
While the core CPI was slightly higher than forecast, the report was seen as a relief by some investors who had worried about another spike in inflation following Tuesday's Producer Price Index report. That reading showed a 1.7 percent increase in September, its biggest jump in nearly 15 years -- a report that shook markets on renewed fears about inflation.
Yields on the 10-year bond fell to 4.19 percent in early trading Wednesday from 4.22 percent before the report as bond prices, which move in the opposite direction, rose. Major U.S. stock indexes also rose following the report. Although stock futures had pointed to a higher open before the report, they gained further after the inflation reading.
A squeeze on profits?
The report Wednesday left the CPI up 3.2 percent over year-ago levels, and the core-CPI up only 2.0 percent. That's less than the 4.4 percent gain in overall PPI during the last year.
While the modest rise in retail prices is good news for consumers, it could be bad for investors. If wholesale prices continue to rise faster than consumer prices, it could start to put a squeeze on corporate profits, which were up 16.8 percent in the third quarter compared to a year earlier, according to earnings tracker First Call.
"I don't think you have to worry about a profit squeeze, but don't be surprised when people start shouting profit growth has peaked," said John Silvia, chief economist at Wachovia Securities. "A lot of companies that are seeing increased costs for raw materials will not be able to pass them on to the consumers."
Silvia said that retailers who are buying overseas goods with a weaker dollar will be among those feeling profit margins squeezed, as will companies that are heavy users of oil, including chemical and plastic companies.
"The recent decline in crude oil prices took out a little bit of the peak in energy cycle. But the fundamental underlying price is higher than it was a year or six months ago," said Silvia.
But Drew Matus, senior economist with Lehman Brothers, said he's not convinced that consumer price gains will continue to outstrip wholesale prices. Even if they do, there are other factors to consider when looking ahead to corporate profit trends, including labor productivity gains. But he also said that expected higher energy prices will be eating into profits going forward.
"It's our view the energy price story is what's going to hurt corporate profits, along with productivity gains slowing down a little," said Matus.
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