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NEW YORK (CNN/Money) -
Consumer prices rose at the fastest pace in more than 25 years last month, spurred by a surge in energy prices to record highs after Hurricane Katrina.
At the same time, though, a closely watched measure of so-called core inflation, excluding volatile food and energy prices, showed surprisingly little price pressure in September.
The Consumer Price Index, the government's main inflation gauge, jumped 1.2 percent in September after rising 0.5 percent in August, the Labor Department reported.
The department said energy costs were responsible for 90 percent of the rise. Record gasoline prices in September after Katrina sent energy prices soaring 12 percent in the month.
The overall CPI number was the biggest monthly jump since March 1980, and it was quite a bit worse than expected. Economists surveyed by Briefing.com had forecast a 0.9 percent rise in the headline number.
But the "core" CPI edged up just 0.1 percent, the same rise seen each of the four previous months. Forecasts had been for a 0.2 percent rise in the core inflation rate.
Still, with gasoline retreating from post-Katrina highs and the stable reading in the core inflation figure, the report helped soothe investors' inflation fears hitting financial markets over the past week.
On Wall Street, stock prices rose modestly in early trading while Treasury bond prices were little changed.
"I think that it's certainly better than people have feared. There was a lot of fear, which is the reason that stocks and bonds have been selling off" in recent sessions, said Mark Vitner, senior economist for Wachovia Securities.
Vitner said that the tame core number was important since it is more closely watched by policy makers at the Federal Reserve who have been raising interest rates in a bid to ward off inflation. And overall CPI is likely to retreat in October since gasoline is backing off from September highs.
In Washington, Reuters reported that the White House spokesman Scott McClellan said President Bush has confidence in the Fed's ability to address any inflation concerns.
The jump in prices had one silver lining -- it will mean larger Social Security benefit checks next year. The government bases the cost of living adjustment in benefits on CPI, and with the big jump, Social Security benefits will rise 4.1 percent in 2006, the biggest increase since 1991.
When will energy hit other prices?
But Vitner said that the risk that energy prices pose to the economy hasn't passed.
Even with the recent declines, energy prices overall are up more than they were two or three months ago and well above year-earlier levels. For example, gasoline prices have fallen 8 percent from the record high hit Sept. 5, but are still up 42 percent from a year earlier, according to AAA.
Heating oil and natural gas bills will be much higher this winter, the government said this week. That all will work its way into other prices eventually, Vitner said.
"People keep asking, 'How can it be that we haven't seen energy prices bleed over into the core?'" Vitner said. "Our belief is that it will eventually show up in the core CPI, but it may not show up in 2005. It may be in first quarter of 2006."
Over the last 12 months, the overall CPI is up 4.7 percent, the biggest 12-month change since June 1991. A 34.8 percent rise in energy prices over the last year is responsible for the big jump.
The 12-month rise in prices was substantially larger than the 3.3 percent rise in average weekly earnings, or the 2.7 percent gain in average hourly pay, over the same period, according to a separate government report.
The core CPI is up a modest 2 percent over the last 12 months, lower than the rise recorded the previous two months.
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For a look at Wall Street's recent inflation worries, click here.
For a look at other news about the economy and what it means to you and the markets, click here.
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