Soaring oil prices have dealt a double blow to the U.S. economy, worsening the country's inflation rate and increasing its trade deficit, the government reported yesterday.

The increased cost of oil, triggered by Iraq's Aug. 2 invasion of Kuwait, was reflected in the Labor Department's consumer price index for September, which put the annual rate of inflation at 9.5 percent, about double last year's rate.

The monthly inflation increase in September was 0.8 percent, the second straight month consumer prices have jumped by that amount.

It also triggered the largest increase in Social Security payments in 8 1/2 years. The last quarter in the fiscal year provides the base for increases in Social Security and other so-called entitlements that take effect in January; the large increase in September pushed up the quarter's average.

The increase in the cost of living intensified fears among some economists of a return of inflationary pressures at a time when the economy is worsening. Those dual economic trends are forcing the Federal Reserve Board to walk an economic tightrope, balancing the need to lower interest rates to help spur growth with fears that the easier money could intensify inflationary trends.

Despite the troublesome economic reports, prices on the New York Stock Exchange surged yesterday, with the Dow Jones industrial average rising 64.86 points. {Details on Page F1.}

On the trade front, an increase in the price of oil imports forced a 2.4 percent jump in the trade deficit in August. Without a 35 percent increase in oil prices, however, the August trade deficit of $9.3 billion would have shown a modest improvement from the month before.

Similarly, more than half of the jump in the CPI resulted from an increase in prices for petroleum products such as gasoline and heating fuel.

"Oil dominates," said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. "Oil is most of the story in the CPI, and oil is the whole story as to why the trade figures got worse."

Both the trade numbers and the CPI are expected to worsen in the months ahead. The $36.80-a-barrel price of oil reported yesterday, although down sharply from the record $41-a-barrel price of earlier this month, is still far higher than the average price of $19.54 paid in August. In another financial market yesterday, the dollar finished sharply weaker against most key currencies.

"While the recent strong export performance has delayed, if not prevented, the onset of recession, oil price shocks are likely to offset that benefit," said William T. Archey, international vice president of the U.S. Chamber of Commerce.

"September oil prices will show a truly significant increase," he said.

Furthermore, Allen Sinai, chief economist of the Boston Co., noted that the inflation rate still has not registered the full movement of the oil price rise through the economy, with its impact on industries such as chemicals and plastics in which energy costs play a significant role.

This generally occurs four to six months after an oil price rise, but Sinai said the full impact might be masked by weaknesses in the economy that would depress inflation.

Economists differed yesterday over whether the second straight monthly increase in the cost of living figures means that the United States is entering a dangerous period of inflation combined with slow or no growth.

"We continue to have an unsatisfactory rate of core inflation on which the oil price hike has been superimposed. What we are seeing is a rather somber picture, which makes it very hard for monetary authorities {the Federal Reserve Board}, which are concerned about inflation," said Robert Dederick, chief economist of the Northern Trust Co. in Chicago.

His fears of renewed inflation were echoed by William K. MacReynolds, director of forecasting for the U.S. Chamber of Commerce, who said that rising prices are "getting as bad as during the last recession in 1981, and {they} are not just due to energy prices."

Both men said that core inflation -- the overall CPI with the more volatile energy and food costs taken out -- increased at an annual rate of 5.7 percent for the first part of the year.

Other economists, though, were less concerned about inflation. Cynthia Latta, a senior financial economist with Data Resources Inc., a Lexington, Mass., economic forecasting firm, called the cost of living increase "not all that bad if you take out energy." While Dederick and MacReynolds were worried about the so-called core rate of inflation, she found the CPI "reassuring" -- without the spurt in energy costs.

Sinai said a $40 billion reduction in the federal budget could give Federal Reserve Board Chairman Alan Greenspan room to lower interest rates after a substantive budget agreement is reached. But Sinai said yesterday that the cost of living figures will make it hard for the Fed to ease up on interest rates.

Even without oil, the trade numbers were mixed and showed the United States was unlikely to show much improvement over last year's $109 billion deficit. The deficit now is running at an annual rate of about $100 billion.

With increased oil prices a certainty, the figures for the last four months of the year are expected to worsen.

Nonetheless, Commerce Department Chief Economist J. Antonio Villamil said that the non-oil trade deficit, which he called a better indicator of the United States's international competitiveness, decreased slightly in August.

Exports, which Sinai called "the brightest spot in our economy," increased by $500 million, to $32.6 billion, as foreigners bought more U.S.-made chemicals, electrical machinery, cars and auto parts.

With a slowdown in overseas economies, however, export growth is likely to slip.

Imports increased slightly, up $700 million to $42 billion. Without the jump in energy costs, though, there would have been a $100 million dip in imports.

The Chamber of Commerce's Archey noted that "the only silver lining in the U.S. trade picture" is the 12-fold increase in the surplus with the European Community.

But the U.S. trade deficit with Japan, the country's largest, jumped by $800 million, to $3.8 billion, after having declined in May and June.