Inflation surge: Here to stay?

If it feels like money is flowing out of your pocket, it isn't your imagination.

In the wake of the hurricanes, the cost of living across the nation is skyrocketing.

• In Ft. Lauderdale, Fla., Jerry's Café is telling customers it will raise breakfast prices by 10 percent.

• It used to cost Jacques Stambouli of Via Trading $650 to move a truckload of goods from Reno to Los Angeles. Today? $750. He's passing the hike on to consumers.

• And in Bethlehem, Pa., Linda Cameron complains that a paperback book is now $15. "It's crept up from $11," she says.

Such changes are expected to show up Friday when the government reports the September consumer price index (CPI). Economists expect this inflation indicator to show a rise of between 1 and 1.5 percentage points.

This would be the sharpest spike since January 1990, when the CPI rose by 1.1 percent after a cold snap in December shot energy prices higher.

It is a number that will be scrutinized carefully by the Federal Reserve as it weighs whether to continue raising interest rates. And the financial markets will also be parsing the inflation number to determine if the September event is a one-time price shock, or something more worrisome.

"It will be ugly," says economist Lynn Reaser of the Investment Strategies Group at Bank of America in Boston. "In any case it's only one month's number, but it could either alleviate or exacerbate inflation concerns which have recently accelerated."

Inflation fears will be lessened if the numbers indicate the price spike has only taken place in the more-volatile areas of energy and food. However, if inflation has spread to what economists call the "core rate" - the less-volatile areas - there will be concern. At the moment, some economists expect this core rate to increase by 0.2 or 0.1 percentage points.

"I think [the core rate] will be slower now than six to nine months ago," says Anthony Chan, senior economist at JP Morgan Asset Management in Columbus, Ohio. "Business is not passing along all its additional costs."

Oxford & Hill Home Products is a case in point. The Miami-based firm produces home closet storage systems. Some of the products are made with petro-chemicals, which have risen sharply in price over the last several months. "The higher costs are recognized by the retailers and some are willing to work with us in sharing the burden," says CEO Jonathan Mayer.

However, he says it's more difficult for the retailers to pass along the higher costs. "It's still a competitive retail market and the ability to pass on the costs does not always exist."

Still, some businesses are passing on their higher costs. For example, Headway Corporate Resources in New York has a large contract to do national research for the National Institute of Mental Health, a federal organization. One thousand of the company's employees drive 100 miles a day to do their interviews.

"We estimate the incremental cost just to the price of gasoline in the last twelve months is costing our company $10,000 per day, which is passed on to the customer," says Headway CEO Jean-Pierre Sakey.

One of the effects of higher energy prices is that it will absorb any salary increases employees receive, says Bill Coleman, senior vice president of Salary.com, in Boston. The firm estimates that the average worker will receive a raise equal to 3.7 percent of their current pay. But higher gasoline prices will total 3.3 percent of an individual's pay. "The good news is that people will get a raise this year; the bad news is that it's all going into the gas tank," he says.

Although gasoline prices have backed off their recent highs, there won't be much relief for many consumers because the cost of staying warm this winter is expected to rise sharply.

Wednesday, the Energy Information Administration, in its winter-fuels outlook, estimated consumers would pay, on average, 48 percent more for natural gas, 32 percent more for home- heating oil, and 30 percent more for propane.

Mark Wolfe, executive director of the National Energy Assistance Directors' Association, estimates the average family will spend about $1,700 more for energy this year. "For low- and some moderate-income families this is most of their discretionary income," he says.

Inflation is starting to show up as a concern for consumers. In a survey of consumers by the Conference Board, a business-research organization, inflation expectations soared in September, up sharply from the summer.

"We think a lot of that is reaction to the spike in prices at the pump following Katrina," says Lynn Franco, director of the Conference Board's consumer-research center. The last time the Board's surveys showed such an increase was in 1990 when the US entered a recession.

However, economists hope this is only a one-month spike. "Productivity gains are still good and workers are not receiving large pay increases," says Ms. Reaser. "Labor costs are still contained."

Despite the sharp increase in energy prices, Reaser points out that they represent just 8 percent of the CPI.

However, they can still have a significant impact. Last year, consumer prices rose 3.6 percent. Soaring gasoline prices represented 1.6 percentage points of the CPI. "Without gasoline rising that much, the CPI would have only gone up 2 percent," she says.