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Did utility costs decline 28.3% during past year?

Deseret Morning News graphic

It's not a typo.

The Wells Fargo Cost of Living survey stunned the bank's own economists Wednesday in showing that the cost of utilities dropped 28.3 percent along the Wasatch Front in the year-over period ending in mid-October, pulling the overall inflation index dramatically lower.

"Certainly utility pricing is never a simple matter," said Kelly K. Matthews, executive vice president and economist at Wells Fargo. "The comments (from the bank's researchers) were that this was a decline in water prices, which might very well be. But the impact on the number is just way out of line. So there's clearly got to be a revision, and therefore all categories will have to be revised as well."

Unrevised, the October report found that the overall cost of living along the Wasatch Front declined 3.4 percent. Along with the belly flop in utilities prices, Wells reported that the cost of transportation fell 7.1 percent during the year-over period. Education and communication costs fell 1.3 percent, while housing costs saw an 0.8 percent drop.

Increases were reported in the cost of groceries (1.8 percent) and clothing (1.3 percent). All other categories reported stable prices.

Meanwhile, the U.S. Labor Department reported Wednesday that consumer prices at the national level rose 0.2 percent in October, the best showing in four months. October's findings were helped by a 0.2 percent drop in energy costs. Energy prices have risen 37.1 percent at an annual rate through the first 10 months of this year. That compares to a 16.6 percent jump in energy prices in 2004.

The nation's core inflation rate, which excludes the more volatile food and energy categories, edged 0.2 percent higher in October, up 0.1 percent from the increases of the previous five months. However, in a worrisome development for winter heating bills, natural gas prices shot up 14 percent in October, the biggest increase since January 2001. Prices for electricity were up 0.7 percent, but prices for home heating oil fell by 0.4 percent. Food costs edged up 0.3 percent in October, while clothing costs fell 0.4 percent.

Stock markets were mixed Wednesday. The Dow Jones industrial average fell 11.68 to 10,674.76. The Standard & Poor's 500 rose 2.20 to 1,231.21, and the Nasdaq Composite added 1.19 to 2,187.93.

The next four months likely will prove draining on consumers' pocketbooks, Matthews said, thanks to those home heating costs. The government already is forecasting that natural gas users nationwide can expect to see their bills increase by 48 percent this winter heating season, or $350 extra for the typical household. People who use home heating oil will see a 32 percent increase, which also averages to $350 more. Locally, analysts predict a 35 percent to 40 percent increase in natural gas prices during the winter months.

"There is beginning to be evidence that high energy prices are starting to spill over into the rest of the economy," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., economics consulting firm.

As evidence of that, analysts noted airline fares were up 1.5 percent in October while hotel and motel rates jumped 3.5 percent and medical care costs rose by 0.5 percent, the fastest pace in seven months.

"Make no mistake about it. Inflation is building in the pipeline," said Richard Yamarone, chief economist at Argus Research in New York. "It is no longer a matter of if, but when, those price pressures will start to affect the general price level."

But Matthews said there are indications — in the free market pipeline price of natural gas, for example — that fuel (heating and gasoline) prices could ease by midyear 2006.

"I believe there will be a rather definite reduction in natural gas prices, at the regulated price, after next summer," Matthews said. "Initially, we've got to get through costs that will be 35 percent higher than we had last year. But the pipeline price, I believe, has peaked, and the pipeline price next summer I think will be down towards $8, and that will enable the regulated price to be lowered — not back to what we'd been used to in years past, but lower than it will be this year."

Gasoline prices likely will remain at or near current levels through the winter, Matthews said, but could drop below $2 per gallon for regular unleaded gasoline in the spring.

"I would be very surprised in the winter period if our gasoline prices dropped below $2 (per gallon)," he said. "If we can hold at $2.15, I think that's pretty darned good, because crude oil prices are somewhere in the $57.50 to $50 range. . . .

"Let's presume that we can get through the next four months with gasoline prices something where they are now. Then I think that crude oil prices will in fact drop to $50 (per barrel), and maybe in the very high $40s next year, and that would enable our gas prices to be . . . say, somewhere in the $1.75 to $1.80 range."

If that situation bears out, Matthews predicted that the Federal Reserve won't feel as much pressure to continue raising interest rates. At present, Wells Fargo expects three more increases, each 0.25 percent, in the next four months. And, if long-term interest rates hold steady enough to keep from damaging the housing market, Matthews said there is cause for optimism.

"Maybe, maybe the world turns out to be all right," he said. "If we can get through this winter, if we can get oil prices down a little bit and natural gas prices down, the Fed stops tightening and long-term interest rates level out in a range that will enable the housing market to do pretty well, maybe the world is good after all."

Sterling Jenson, senior managing director for Wells Capital Management in Salt Lake City, said it's possible some of that Matthews-esque enthusiasm has finally gotten through to the stock market.

"We like stocks still," Jenson said. "We think that the market valuation is cheap on a relative basis.

"We're still saying that the stock market has significant room to move up at least 10 percent, if not by the end of the year, perhaps spilling into next year."

Contributing: The Associated Press