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U.S. prices climb higher
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October 18, 2000: 11:16 a.m. ET
Surging energy costs push September CPI up 0.5%; core index rises 0.3%
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - U.S. consumer prices outside of food and energy posted their biggest advance in six months in September, raising concern among analysts and investors that the robust pace of the economy is beginning to give merchants room to raise prices on goods and services.
In a separate report, the Commerce Department said construction of new homes and apartments rose 0.3 percent to a seasonally adjusted annual rate of 1.53 million units last month, a shade above analysts' forecasts.
 The Consumer Price Index, a prominent inflation gauge, rose 0.5 percent in September, the Labor Department said Wednesday, a shade above the 0.4 percent reading expected by economists and the 0.1 percent drop registered in August. Most of the month's gains came from rising energy prices.
But the index's core rate, which strikes out the volatile costs of energy and food, gained 0.3 percent last month after a 0.2 percent increase in August. That was the largest gain since a 0.4 percent rise in March and followed five consecutive months of 0.2 percent gains.
On an annual basis, CPI rose at a 3.8 percent rate through September, compared with a 2.7 percent increase for all of 1999. The CPI's core rate rose at a 2.8 percent annual rate, compared with a 1.9 percent increase for all of last year.
No signs of slowing
"Normally, economists downplay periodic swings in energy prices," said Mark Vitner, senior economist with First Union Securities. "However, the most recent run-up is a source of concern because it may be raising inflation expectations. Workers do not live in a world that excludes food and energy prices. Wage demands, especially in the current tight labor market, will be based on the increase in the overall CPI."
 The Fed's policy setting arm, the Federal Open Market Committee, has raised rates six times since May 1999 in an effort to slow the economy down and keep inflation in check. The FOMC's last move was in May, when it lifted its benchmark fed funds rate by a half-point to 6.5 percent. It left rates unchanged at its last meeting, held earlier this month.
Still, neither the pace of the economy nor the pace of inflation has shown any signs of tapering off. The economy expanded at a 5.6 percent rate in the second quarter and is expected to have grown by more than 4 percent in the third.
All that did little to lift the somber mood on Wall Street, where concern about profit potential among the country's bigger technology and consumer-related companies prompted a sharp decline in both the Dow Jones industrial average and Nasdaq composite index at the opening bell. Bonds posted limited gains, with shorter-term securities benefiting the most from flight-to-quality trades.
Clothing, food prices gain
"Financial markets want the Fed to signal possible easing ahead due to the growth slowdown and stock market declines," said Sherry Cooper, chief economist with BMO Nesbitt Burns. "However, the Fed will be reluctant to do that while CPI core is still accelerating."
 Tobacco prices jumped 3.5 percent last month, the most since a 4.4 percent increase in April. R.J. Reynolds Tobacco Holdings Inc. (RJR: Research, Estimates) and other tobacco companies have raised cigarette prices charged to U.S. distributors in recent months to help pay for legal settlements, and some states have boosted taxes.
And clothing prices jumped 1.6 percent after increasing 0.2 percent in August, the largest gain since February 1990. That increase follows a very sharp downward trend in recent months; prices actually declined at a 5.7 percent annual rate in the three months to August.
Consumer food prices, which account for about a fifth of the index, rose 0.2 percent in September, the same as the month before. Housing costs, which represent about one-third of the index and include some energy costs, increased 0.4 percent.
The cost of shelter, which includes costs for homeowners as well as renters by deducting a portion of rental fees, gained 0.2 percent. Medical care costs rose 0.4 percent and prescription drug prices rose 0.2 percent. The cost of education fell 0.7 percent after rising 0.2 percent in August.
"Not much of a concern"
To be sure, not all analysts agree that the U.S. economy is in danger of being thrown off kilter by accelerating inflation.
Kathleen Camilli, an economist with financial planning firm Tucker Anthony, said that while she expects to see a short-term rise in cyclical inflation due to rising energy prices, longer term the economy is in a period of stable, if not declining, inflation. (450KB WAV) (450KB AIFF)
 "I don't think these figures are much of a concern," Camilli told CNNfn's Before Hours. "This is the highest rate of inflation since 1990, but it is because of higher energy prices. Without energy prices inflation remains relatively moderate."
Indeed, most of last month's gains came from a 3.8 percent jump in energy costs -- the biggest increase since June. Fuel oil prices rose 12 percent last month while gasoline prices gained 5.4 percent.
And going back 10 years, the average annual rate of inflation in the United States was 3 percent, according to Labor Department figures, well in line with current levels.
Nonetheless, rising oil prices are continuing to worry Fed policy makers. Prices are close to 10-year highs because of rising demand, reduced production, and concern that turmoil in the Middle East could interrupt supplies.
Construction starts edge higher
Crude oil for October delivery last month rose as high as $37.80 a barrel on the New York Mercantile Exchange, the highest since October 1990. Prices have been at or close to 10-year highs all month and are up more than 29 percent so far this year.
 Separately, the Commerce Department said construction starts on new U.S. homes and apartments rose 0.3 percent to a seasonally adjusted 1.53 million a year rate, weaker than the 1.54 million rate forecast by economists, after a slightly revised 0.1 percent decline in August.
Regionally, September starts dropped 4.4 percent in the South, the nation's largest housing market, and fell 2.6 percent in the Midwest. But in the Northeast, September starts climbed 8.1 percent and in the West they rose 8.6 percent.
Building-permit applications increased slightly in September to 1.506 million a year from 1.486 million, signaling that the industry still hopes for a steady pace of business. Mortgage rates have stabilized at relatively modest levels, with the 30-year rate under 8 percent for a ninth consecutive week last week. 
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