Inflation skyrockets after hurricanes

Consumer prices surged last month at the fastest rate in 25 years, driven by energy cost spikes that followed the devastating Gulf Coast hurricanes.

The consumer price index, a widely used measure of inflation, jumped 1.2 percent from August, led by an 18 percent jump in gasoline prices, the biggest monthly increase since 1980, the Labor Department said yesterday. Over the past year, consumer prices nationally have risen 4.7 percent, the fastest rate of inflation since 1991.

Inflation is putting an even tighter squeeze on Greater Boston consumers. Overall prices here are up 4.9 percent from a year ago. Boston gasoline prices jumped 69 percent in the past year, compared to 55 percent nationally, while the cost of heating fuels and utilities rose 24 percent, compared to 13 percent in the United States.

Besides measuring inflation at the retail level, the consumer price gauge is typically used to index cost-of-living increases in labor contracts and government benefits. The Social Security Administration said the recent quickening pace of inflation means benefits will rise 4.1 percent next year, or, $21 billion, the biggest cost-of-living adjustment since 1991.

Economists said yesterday the inflation report was not as bad as it looked, since the sharp increases were concentrated in energy sectors, largely because of supply disruptions from hurricanes Katrina and Rita. Excluding the volatile food and energy sectors, underlying or ''core" inflation rose just one-tenth of a percent in September and 2 percent over the past year.

''The fact that we're not getting a spillover into the rest of the economy is pretty good news," said Nariman Behravesh, chief economist at Global Insight, a Waltham forecasting firm. ''The question that core inflation asks: Is the price of everything going to go through the roof? So far the answer is no."

But that's little comfort to consumers paying sky-high gasoline prices and bracing for winter heating bills projected to rise as much as 50 percent from last year. Energy-driven inflation is eating into paychecks and household budgets. The Labor Department reported yesterday that inflation-adjusted weekly earnings fell 1.2 percent in September, and 2.7 percent in the past year, the biggest declines since the early 1990s.

In many ways, yesterday's inflation report signals a change in the economy's footing. A recession remains unlikely, but high energy costs are creating a drag on growth, hurting consumer confidence and spending, which accounts for about two-thirds of the nation's economy.

And while skyrocketing oil and gas prices have yet to filter significantly into other consumer products, concerns that they could are sending interest rates higher.

The Federal Reserve, which has boosted its benchmark short-term rate 11 times since June 2004, is expected to keep going, a quarter-point at a time, pushing the benchmark as high as 4.75 percent by spring. The current rate is 3.75 percent.

Long-term rates, which had earlier failed to follow the Fed's lead, are moving up, too. Thirty-year mortgage rates rose above 6 percent for the first time since late March, Freddie Mac, the government-created mortgage lender, reported this week.

Global Insight projects the 30-year rate will hit 6.2 percent by year end, and 6.8 percent by the end of next year.

That, in turn, should take more steam out of an already slowing housing market, damping price appreciation and cutting into another source for consumer spending: home equity. The National Association of Realtors recently projected the average price for existing homes will rise about 5 percent in 2006, compared to 12.5 percent this year.

Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said the rapid rise in home values in recent years prompted many consumers to cash out some of the added equity, typically by refinancing loans.

But with slower price appreciation, there's going to be less equity available to homeowners. Next year, the amount of cash taken from home equity is projected to plunge to $69 billion from $162 billion, Anderson said.

Anderson said that home equity cash has helped offset the impact of rising energy costs over the past year. But with this source dwindling, rising energy costs will be felt more acutely, resulting in slower growth in consumer spending and, consequently, the economy.

For example, the National Retail Federation, citing higher energy costs, recently forecast that Christmas holiday sales will slow this year, growing about 5 percent, compared to 6.7 percent in 2004.

Eric Weinstein, a Framingham lawyer and father of two, expects his heating bills to rise by at least one-third this winter. He provides another example of how high energy costs are leading consumers to pull back.

Recently, facing the prospect of soon filling up a 250-gallon heating oil tank at $2.50 a gallon, Weinstein and his wife decided against making a family outing to the theater.

''We can afford the increase without too much pain," Weinstein said, ''but it's money diverted from a family vacation, dinner out, or family activities."

Economists, however, expect energy prices and, subsequently, inflation to ease somewhat as Gulf Coast oil production and refineries continue to recover. Already, energy prices have retreated: Crude oil is down 10 percent in New York commodities markets since the post-Katrina peak.

Robert Gavin can be reached at rgavin@globe.com.