While core inflation was relatively well-contained in August, national and local reports released Thursday show that the economic effects of Hurricane Katrina have yet to fully be revealed.
Wells Fargo Bank's monthly Wasatch Front Cost of Living report found that prices rose 1.0 percent in August, led by a hefty 5.8 percent jump in transportation costs.
On the national front, the Consumer Price Index rose 0.5 percent, the U.S. Bureau of Labor Statistics reported Thursday, again led by a jump in energy prices — which had shot up by the largest amount in more than two years even before Katrina hit at the end of the month. The hurricane caused a further price spike due to widespread shutdowns of oil and natural gas facilities in the Gulf Coast region.
Excluding volatile energy and food costs, however, the "core" rate of inflation nationally rose a modest 0.1 percent.
"Overall, inflation appears to be pretty well contained," said Sterling Jenson, regional managing director for Wells Capital Management. "The question is, what will be the full impact of Katrina?"
Since much of the data coming out now was collected prior to Katrina's landfall, analysts will have to wait for September's economic reports are released to see more clearly the storm's aftermath. But, analysts have predicted that the storm, the country's worst natural disaster, will trim economic growth by as much as a full percentage point in the second half of this year and cost around 400,000 jobs.
While they do not believe that storm-related disruptions will be enough to push the country into a recession, analysts caution that this forecast could be proven wrong if energy prices keep soaring, triggering significant cutbacks in spending by consumers in other areas.
Phil Hopkins, managing director of U.S. regional services for Global Insight, estimates that the seasonally adjusted unemployment rate in the area of New Orleans, Metairie and Kenner was 4.9 percent in July. He said that based on his calculations, the jobless rate there could easily climb to 25 percent.
And analysts predicted that the overall inflation figure will be even higher in September, reflecting the fact that gasoline prices climbed even higher to more than $3 per gallon in September as the impacts of the Gulf Coast shutdowns were felt in supply shortages.
"Gasoline prices have gone through the roof," said Labor Department analyst Patrick Jackman, who said gasoline was about 30 percent higher in the first two weeks of September as compared to the first two weeks of August.
But Jenson noted that gasoline prices have begun to ease and should continue downward as the summer driving season ends and demand lessens.
"We have seen gasoline demand drop rather significantly over the course of the last several weeks since the hurricane, and if that impact continues — especially now that we're past the summer driving months — we should see gasoline prices trend back downward, possibly 20 cents to 30 cents per gallon over the next month or two," Jenson said.
The economy was expanding at a solid pace before Katrina hit and it is this momentum that Jenson and others believe will help keep the economy from being pushed into a full-fledged downturn.
"We suspect we're still in an environment where prices are pretty well contained," he said, pointing to still-low interest rates, mortgage and refinancing costs, and stable prices for consumer goods like clothing and cars.
However, there are some economists who worry that the effect of high energy prices may soon start to spill over into other areas as many businesses are forced to add on fuel surcharges to reflect higher delivery costs for their products.
Over the past 12 months, overall consumer prices have risen by 3.6 percent nationally, the biggest 12-month increase in inflation since a similar rise in the 12 months ending May 2001.
Clothing prices, which had been falling, rose a sharp 1 percent in July, but food prices continued to show moderation, edging up just 0.1 percent last month, reflecting price declines for beef, pork, fruits and vegetables.
Locally, prices were steady in August, except for a 0.1 percent increase in clothing costs and a 0.2 percent drop in grocery prices. And, Jenson said that Katrina's impact on consumer prices going forward — excluding fuel — should be minimal. Utah doesn't import a lot of food, textiles or other goods from the affected region, he said.
The Utah economy also isn't likely to be dramatically impacted by Delta Air Lines' bankruptcy filing Wednesday, Jenson said.
"Surely, for those who are employed by Delta, there is likely to be consternation," he said. "There are questions about whether they'll keep their jobs, what will happen to salaries, pensions and benefits. But, from what Delta has said, and by the way they've been building up operations here in Utah, it could be a net benefit for Utah. We don't know yet. In general, though, I'd say the impact to the average person in the valley will be minimal."
The stock market continued its sideways dance in August, Wells Capital Management reported. Lingering investor wariness and the flow of capital into other areas that investors deem more favorable continue to slow growth, Jenson said Thursday. But Jenson and Wells Capital remain optimistic that the market could still manage 10 percent growth by year's end, though they acknowledge it could be a stretch.
"We continue to be optimistic about the market," he said. "There are strong underpinnings there, with a growing economy, growing corporate earnings. There's a lot of cash sitting on the sidelines — $5 trillion by some estimates — that could come into the marketplace. Corporate cash coffers are at their highest levels ever. We're starting to see merger and acquisition activity. All of these things bode well for the stock market."
For the market, and the economy as a whole, Jenson said Wells sees the glass half-full.
"There will be some negative numbers coming out over the next month or two, but we are still optimistic that the economic recovery and growth will continue through next year, that we'll actually receive some stimulation in 2006 and see GDP (gross domest product) growth in excess of 3 percent, up to 4 percent, over the course of the next year."
Contributing: Associated Press