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NEW YORK (CNN/Money) -
A leap in energy costs drove the prices paid by businesses to the fastest month-to-month gain in more than 15 years in September, according to a report issued Tuesday, as the government's measure of inflation on the wholesale level came in above Wall Street's expectations.
The Producer Price Index showed that the price of finished goods rose 1.9 percent in September after a 0.6 percent rise in August. Economists surveyed by Briefing.com had forecast a rise of 1.4 percent. It's the biggest one-month percentage jump in the PPI since January 1990. As recently as March 2004, the 12-month change in the PPI had been only 1.5 percent.
Energy prices rose 7.1 percent in the month, the biggest one-month percentage change since October 1990, shortly after Iraq invaded Kuwait. The other most volatile component of the index, food prices, rose 1.4 percent, reversing a string of five straight months that food prices declined on the wholesale level. Disruptions in food supplies caused by Hurricane Katrina are believed to have helped lead food prices higher in the month.
But perhaps of greatest concern to economists was a sign that the higher energy prices are starting to bleed into other prices. The so-called core PPI, which excludes often-volatile food and energy prices, rose 0.3 percent after being unchanged in August. Economists' forecasts had been for a rise of only 0.2 percent in the closely watched core PPI.
There also may be more price pressures in the pipeline, as goods at the intermediate level of finish were up 2.5 percent, and crude products posted a 10.2 percent rise. It was the largest jump in intermediate product prices in more than 25 years, although crude prices rose even more in March 2003 as the United States invaded Iraq.
"This raises possibility of a pass through into core inflation," said Drew Matus, senior economist at Lehman Brothers. "While companies can absorb some of the pipeline pressures, the way to do so is productivity gains that we're not seeing anymore."
But some other economists said that they don't see much risk of inflation outside of energy prices due to the fact that consumers will have to cut back on other spending to pay the higher gasoline and heating costs. Some of those economists say there could be a squeeze on corporate profits going forward as businesses are unable to pass along their higher costs.
"Oil prices going up is not inflationary. Inflation is too much money chasing too few goods," said Robert Brusca of FAO Economics, who said investors need to be careful about the coming profit squeeze in different sectors of corporate America.
"You have to look carefully at businesses, who has pricing power, who doesn't, who can pass costs along, and who can't," he said.
The reading follows Friday's Consumer Price Index report that also showed a big jump in the overall measure of retail prices, but little change in the core CPI.
University of Maryland Professor Peter Morici said he's more worried about the higher energy prices coupled with the continued weak pricing power causing a slow down in the U.S. economy. He said he's worried that the Federal Reserve will take the recent inflation readings as justification to raise interest rates higher than the U.S. economy can handle.
"Businesses might ask for more (for consumer goods) but they won't necessarily get it, and then we'll see big discounts for Christmas," said Morici. "This squeeze will slow economic activity. The Fed needs to be very cautious how hard they take the economy downhill because it is already headed in that direction."
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For a look at the jump in retail prices in September, click here.
For a look at the economy and how it affects you and the markets, click here.
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