Producer Prices See Biggest Increase in 15 Years

WASHINGTON – U.S. producer prices (search ) shot up by an unexpectedly large 1.9 percent last month, the biggest gain in more than 15 years, as energy costs surged in the wake of hurricanes that devastated the Gulf Coast, a government report showed on Tuesday.

However, outside of volatile food and energy costs, prices received by farms, factories and refineries rose a relatively subdued 0.3 percent, the Labor Department (search ) said.

Separately, the Treasury Department (search ) said net flows of capital into U.S. assets swelled to $91.3 billion in August. It was the largest inflow in 16 months and suggested the United States was having little trouble finding the overseas capital it needs to balance its books.

Stock prices fell on the producer price report, which kept alive concerns over inflation and profit pressures, and the likelihood of further interest-rate hikes from the Federal Reserve. Bond prices initially slipped but then moved higher.

The dollar strengthened on both the signs of price pressure and evidence of strong foreign demand for U.S. securities.

Wall Street economists had expected producer prices to rise just 1.1 percent, with prices outside of food and energy up a tame 0.2 percent.

Analysts were divided on the degree to which the higher costs producers face from energy prices would feed through to the prices consumers pay.

Energy prices at the producer level soared 7.1 percent in September, the biggest jump since October 1990, while food prices gained 1.4 percent, the largest rise in nearly a year.

"The real question is whether companies will squeeze their (profit) margins as costs increase or if they are going to increase prices," said Michael Metz, chief investment strategist at Oppenheimer Holdings Inc. in New York. "I think they will increase prices."

Fed officials, who have raised overnight borrowing costs from a 1958 low of 1 percent to 3.75 percent in 11 straight quarter-point steps, are widely expected to bump rates up again when they meet in two weeks in an effort to ensure sharp energy price gains do not feed into more broad-based inflation.

Over the past year, producer prices have increased a hefty 6.9 percent on the back of rising energy costs, the biggest 12-month gain since the period ended November 1990. In contrast, so-called core prices have gained just 2.6 percent.

Consumer prices have also jumped. They posted a 4.7 percent gain in the 12 months through September, the biggest jump since 1991. But core retail prices are up just 2 percent.

Mounting energy costs have been the inflation culprit.

U.S. crude oil prices hit a record high of $70.85 a barrel in the aftermath of Hurricane Katrina (search ), which slammed into the Gulf Coast on August 29. Hurricane Rita in late September kept prices elevated and much of the region's oil-producing and refining facilities shuttered.

But prices have drifted lower this month. In mid-morning trade, crude prices were hovering under $64 a barrel.

Gasoline prices at the producer level increased 12.7 percent last month, natural gas costs climbed 9 percent, liquefied petroleum gas prices soared 24.7 percent and home heating oil prices rose 4.8 percent, the department said.

Prices for cars rose 0.9 percent in September and prices for light trucks and SUVs gained 0.5 percent as automakers wound down special sales incentives.

Fed Chairman Alan Greenspan (search ) said on Monday that while surging energy prices would weigh on growth and foster inflation pressure, it was unlikely to have an impact anywhere near as great as the oil price shocks in the 1970s.

So far, U.S. consumers have appeared resilient in the face of higher energy costs and retail sales appear to be getting a boost this month as cooler weather boosts apparel purchases.

The International Council of Shopping Centers and UBS said in a report on Tuesday that U.S. chain store sales rose 0.4 percent in the week ended October 15, the fourth straight gain.

Separately, Redbook Research said chain store sales so far in October have risen 1 percent compared with the same period last month and were up 3.7 percent from year-ago levels.