US price levels give markets another fright

For the third day running, the financial markets got a bit of a fright. This time, reports Diane Coyle, Economics Editor, it was due to news of an alarming increase in the prices charged by US manufacturers.

Wall Street's knee-jerk reaction to the latest economic statistics was to mark share and bond prices sharply lower. Although they later recovered a little, there was little comfort for those who fear the long- awaited stock market "correction" is under way.

The Dow Jones index fell nearly 60 points almost as soon as it opened, but was only 25 points down at 8,036.37 by late morning. Treasury bonds shed more than a point. In London the FTSE 100 index ended 9.5 points higher at 5,227.3 after falling as much as 31 points during the day.

The 0.5 per cent rise in US producer prices last month was more than twice as much as analysts had expected. Prices have stopped falling at an annual rate and now look to be heading firmly upwards.

This appeared to put flesh on the bones of fears expressed on Wednesday by Alan Greenspan, the Federal Reserve chairman, when he warned of the danger of higher inflation due to the tight labour market and strong demand.

Higher energy prices helped explain the price surge, the second monthly increase after seven months of decline. But the "core" index, excluding energy and food, jumped by 0.4 per cent anyway after a 0.1 per cent rise in August.

Energy costs rose 1.5 per cent last month after a 1.4 per cent gain in August. Petrol prices were up 2.2 per cent in September following a 5.9 per cent surge in August.

There were other special factors helping explain the increase in core prices. Tobacco prices jumped 3.2 per cent because manufacturers raised the price of a pack of cigarettes by seven cents at the start of September as the industry prepared for the expected costs of settling lawsuits.

In addition, new car prices increased by 1.4 per cent, their strongest gain since October 1991.

Some economists drew comfort from these one-off effects. David Resler, chief economist at Nomura Securities in New York, said: "There is no discernible change in the underlying tame inflation picture."

But others said yesterday's figures suggested inflation was indeed on an upward trend. "It is likely to affect the market's perception of the possibility of a rate hike," said Christopher Low of HSBC Markets.

This week's succession of bad news has clearly left the world's stock and bond markets on edge. Mr Greenspan's testimony, sowing seeds of doubt about the US economy's prospects for inflation-free growth, was followed on Thursday by an unexpected increase in German and French interest rates. This was seen as a step towards getting European interest rates in line ahead of the start date for the single currency.

A senior Bank of England official said yesterday that preparations in the City of London for the start of the single currency were well under way. Ian Plenderleith, executive director at the Bank, said: "The London markets will need to be able to operate in the euro from the outset across the full range of their wholesale activities and practical preparations are now well advanced to achieve that by January 1999."