Wholesale prices shot up at their fastest pace in nearly three years last month, the government said yesterday in a report that analysts warned could signal spiraling inflation in 1989.
January's unexpected I percent rise in the Producer Price Index for finished goods was the biggest monthly increase since an identical surge in October 1985, and the Labor Department said it was equivalent to a 12.7 percent annual rate of inflation.
The increase was paced by the steepest increase in food prices in a year, the largest rise in energy prices in two years and sharply higher costs in a variety of other categories as well.
The report unleashed a storm of selling in stocks and Treasury bonds, as traders became concerned that the Federal Reserve Board would drive interest rates higher to try to control inflation.
The first inflation report since the change in administrations brought no good news for President Bush, who just a day earlier unveiled budget and deficit-reduction plans pinned on optimistic assumptions for falling inflation and a strong overall economic performance.
Private economists, skeptical about that rosy scenario, have been predicting slower growth this year and warned that the latest report from the Labor Department could lead the Fed to boost interest rates to restrain the economy and keep inflation in check.
"We all should wait for another inflation report or two to draw too pessimistic a conclusion, but my fear is that it will ultimately take a major slowdown or recession to get inflation back down to acceptable rates," said Economist Allen Sinai of the Boston Co.
The Producer Price Index for finished goods had risen 4 percent during 1988, the steepest climb in seven Years and nearly double the 2.2 percent increase posted in 1987. Many private economists expect further increases this year, although not at the double-digit levels that plagued the nation in 1979 and 1980.
The index for finished goods, items one stop short of the retail level, stood at 111.0 in January, meaning a hypothetical selection of goods that cost $100 in 1982 would have cost $111 last month, up one dollar from the previous month.
Economist David Wyss of Data Resources Inc. of Lexington said the dramatic size of January's increase was a "one-month aberration" caused largely by rising energy and food prices, but that the overall trend nevertheless has been one of accelerating inflation.
"I think it's going to be higher again this year, and it could be a lot higher if we have another drought," Wyss said. "Early signs don't look good. We haven't had much precipitation east of the Rockies."
Energy prices were up 4.9 percent last month, in part reflecting recent acceleration in crude oil prices. January's increase, the biggest since a 7.2 percent rise in January 1987, was paced by an 11.6 percent rise in home heating oil and also included a 4.1 percent jump in wholesale gasoline prices and a 4.8 percent rise in natural gas.
With the after-effects of last summer's drought still in evidence, food prices one stop short of grocery store shelves were up 1.1 percent last month, the steepest increase since a 1.5 percent rise in January 1988.
The nation will get this year's first look at inflation on the consumer level when the January Consumer Price index report is released in two weeks. Consumer prices increased 4.4 percent in 1988.