WASHINGTON - Surging costs for gasoline and other energy products fueled inflation at the wholesale level in August, pressure that is expected to become even more intense once the full impact of Hurricane Katrina is felt.
The Labor Department said its Producer Price Index, which measures inflation before it reaches the consumer, jumped a sharp 0.6 percent in August following an even bigger 1 percent increase in July.
In other economic news, the Commerce Department reported that oil imports hit an all-time high in July and the trade gap with China also set a record. However, the overall trade deficit improved slightly to $57.9 billion as exports rose and imports outside of energy fell.
The PPI report showed that energy prices jumped 3.7 percent in August, led by a 9.5 percent rise in gasoline costs. Natural gas for home use was up 2.5 percent. The energy increases captured in the PPI report occurred before Katrina battered the Gulf Coast, sharply reducing production.
Energy Secretary Samuel Bodman and other administration officials touring Gulf Coast energy facilities on Tuesday expressed concern about possible shortages of natural gas in coming months because the region's production may not recover for months.
Last week, the Energy Information Administration predicted that natural gas prices could soar this winter, including increases of as much as 71 percent in the Midwest, because of the hurricane.
The PPI report showed that outside of energy and food, the so-called core rate of inflation showed no increase at all in August, after a 0.4 percent rise in July and a 0.1 percent drop in June.
While rising energy have not yet spilled over into more widespread inflation problems, economists said Katrina is likely to disrupt the benign overall inflation performance.
"Pressure to bump prices up, or levy temporary freight surcharges, will become more intense in September," said Brian Bethune, U.S. economist at Global Insight, a private forecasting firm in Lexington, Mass.
The pre-Katrina inflation reading contained in the PPI showed price pressures were absent outside of energy. Food costs fell by 0.3 percent in July, the fifth consecutive monthly decline, as the price of fruit, eggs and beef all declined. About half of the downward pressure on prices outside of energy in August reflected a 1.3 percent drop in the cost of new passenger cars, the second decline in the past three months.
Analysts are split on whether the Federal Reserve will keep raising interest rates at its meeting next week. Some suggest that the Fed may pause to give policymakers time to assess how much of a jolt the economy will receive from Katrina. Other economists believe the Fed will deliver an 11th quarter-point rate increase out of concern that the higher interest rates are needed to combat rising inflation pressures.
The trade report showed a 2.6 percent improvement over a revised June imbalance of $59.5 billion, which was the second-highest deficit in history.
The deficit this year is running at an annual rate of $693.1 billion, 12 percent higher than last year's record of $617.6 billion.
Critics blame the soaring deficit on Bush administration trade policies, contending that the administration has not been tough enough in attacking unfair trade practices in China and other countries.
"These aren't the kind of records to put on a shelf and brag about because they spell bad news for American industry, workers and families," said Rep. Sherrod Brown, D-Ohio.
The deficit with China increased by 0.3 percent to an all-time high of $17.7 billion and is running at an annual rate 29 percent above the same period last year, when the deficit hit a record $162 billion. This year's widening deficit reflects a 55.2 percent surge so far this year in Chinese imports of clothing and textiles after global quotas were lifted on Jan. 1.
The improvement in the overall July deficit reflected a 1 percent increase in U.S. exports of goods and services, which rose to an all-time high of $106.2 billion as U.S. sales of computer chips, civilian aircraft and American-made cars all increased.
Total imports fell by 0.7 percent to $164.2 billion as declines in demand for foreign aircraft, computers and industrial machinery offset the big jump in oil imports.
Imports of oil jumped by 21.3 percent to a record of $20.7 billion in July. The increase reflected an increase in volume and price with the average price per barrel of crude oil imported in July hitting a record $49.03.
With oil prices soaring briefly above $69 per barrel after Katrina struck, analysts believe that America's foreign oil bill will surpass the July record, adding further pressure on the overall deficit.