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  Consumer Prices Jump 0.4 Percent

By Martin Crutsinger
Associated Press Writer
Tuesday, Oct. 19, 1999; 10:17 a.m. EDT

WASHINGTON –– Inflation at the consumer level jumped 0.4 percent in September, the biggest increase in five months, reflecting sharply higher prices for gasoline, cigarettes and clothing.

The Labor Department said last month's increase in the Consumer Price Index, the government's most closely watched inflation gauge, followed a 0.3 percent rise in August.

So far this year, consumer prices have been rising at an annual rate of 2.8 percent, sharply higher than the tiny 1.6 percent increase in 1998.

The faster pace of inflation will mean a bigger cost of living increase for the 44.2 million Americans getting Social Security checks, who will see their benefits rise by 2.4 percent starting in January, nearly double the 1.3 percent increase they received this year.

But rising worries about inflation have set off alarm bells on Wall Street with investors concerned that the Federal Reserve will be forced to raise interest rates again at their next meeting on Nov. 16.

In another report today, the Commerce Department said that construction on new homes and apartments fell by 3.2 percent in September, the second monthly decline, as the impact of rising mortgage rates and Hurricane Floyd dampened activity.

The decline, which was bigger than had been expected, pushed housing construction down to a seasonally adjusted annual rate of 1.62 million units following a revised 0.5 percent drop in August.

Hurricane Floyd was blamed for part of last month's weakness with construction starts down 3.2 percent in the South and an even bigger 25.7 percent in the Northeast, the two regions affected by heavy rains and flooding.

Housing construction was also off 3.5 percent in the West with only the Midwest enjoying an increase in activity last month, a gain of 8.2 percent. Mortgage rates have been rising in recent weeks with 30-year mortgages averaging 7.82 percent in September, more than a full percentage point higher than a year ago.

With the September inflation figures matching economists expectations, Wall Street chose to focus today on the weaker-than-expected housing report. Bond prices initially rallied a bit with investors hoping that the slowdown in this key area of the economy may convince the Fed that its two earlier rate increases are having the desired effect of slowing the economy.

Federal Reserve Chairman Alan Greenspan contributed to investor unease last week by warning that banks and other lenders need to make sure they are prepared for the possibility of a "bursting bubble" of stock prices.

For all of last week, stock prices were down by the biggest amount in a decade, a slide that was hastened on Friday by the government's report that prices at the wholesale level shot up 1.1 percent in September, the biggest gain in nine years.

The 0.4 percent gain in prices charged consumers at the retail level was the biggest increase since a 0.7 percent spurt in April.

The acceleration in inflation this year has come from energy costs, which through September have been rising at an annual rate of 16.1 percent, compared to a decline of 8.8 percent for all of 1998, a year in which the Asian currency crisis cut sharply into global demand for crude oil.

For September, energy prices jumped by 2.7 percent, the third straight month of sharp increases. Gasoline prices climbed 2.6 percent last month while home heating oil shot up 6.2 percent, the biggest increase in three years.

Food costs rose a modest 0.2 percent for the third straight month as a big drop in fruit prices helped to offset sharp increases in the cost of vegetables and beef.

Outside the volatile food and energy sectors, prices were up 0.3 percent, leaving the so-called core rate of inflation rising at a much more moderate 1.9 percent so far this year.

Critics of the Fed's rate increases point to the absence of inflation outside of energy to argue that the central bank does not need to be raising borrowing costs to slow down economic activity.

The core CPI increase of 0.3 percent would have been an even smaller 0.2 percent in September had it not been for a sharp spurt in tobacco costs, which were up 6.5 percent. That was the largest monthly rise since an 18.5 percent spurt in tobacco costs last December. Both big gains reflected the impact of huge court settlements in tobacco liability cases.

Clothing costs, which had fallen for four straight months, were also up September, rising by 1.2 percent, as retailers boosted prices for fall and winter clothing lines.

© Copyright 1999 The Associated Press

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