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October 13, 2000

Wholesale Prices, Retail Sales Each Surged 0.9% in September
A WSJ.COM News Roundup

Food, Oil Prices Show Inflation is Coming on Strong! ... Weiss comments

WASHINGTON -- Wholesale prices rose a higher-than-expected 0.9% in September, posting the sharpest increase in seven months amid big jumps in the costs of cars, gasoline and heating oil.

Retail sales also rose an unexpectedly sharp 0.9% for the month, mostly reflecting strong car sales.

The jump in the producer-price index, which measures inflation pressures before they reach consumers, came mostly on the back of a 3.7% increase in energy prices, the Labor Department said Friday. The core PPI, which excludes volatile energy and food components, rose 0.3%.

Much of September's one-month jolt in finished goods, which is what the overall PPI measures, came from a 9.3% increase in gasoline prices, the largest increase since June, and a 13.4% increase in heating oil, the biggest rise since February. Prices of residential electricity, however, declined 0.3%.

Automobile prices surged, as well. Prices of passenger cars rose 1.4% after a 0.3% decline in August. Economists attributed the increase largely to statistical quirk, however: In September, the Bureau of Labor Statistics stopped measuring the prices of 2000-model cars and begins measuring prices of 2001 models.

Wholesale food prices rebounded in September, rising 0.4% after a 0.7% decline in August.

Computer prices, meanwhile, continued to fall in September, although the rate of decline slowed. Computer prices fell 0.3% in September after a 2.2% decline in August. Prices of prescription drugs declined 0.1% last month after rising 0.3% in August.

Retail Sales Jump 0.9%

The 0.9% jump in retail sales, reported separately by the Commerce Department, brought total sales to $273.24 billion. Excluding autos, sales rose by a more moderate 0.7% for the month.

September auto sales jumped by 1.4%, the strongest showing since February. Analysts had been anticipating strong auto sales as dealers offered price incentives in September.

Sales of nondurable goods also posted a gain of 0.9% for the month, boosted by strong receipts at gas stations, drug stores and restaurants and bars. A 2.1% gain at gas stations, mostly caused by higher gas prices, was the strongest since June.

After several down market days, Wall Street was looking for an excuse for a rally. Wall Street reacted enthusiastically to the news that retail sales increased in September. But don't expect this "dead cat bounce" to last very long. Investors will soon recognize that nothing has changed. Companies continue to issue profit warnings, blaming the weak euro, high oil prices, and softening demand.

The main factors boosting retail sales -- autos and gasoline -- hardly point to stronger earnings. Autos got a boost only because dealers offered price incentives -- this practice always cuts into profits. And the reason gas station receipts grew is higher gas prices, not increased demand. Though Wall Street would like you to believe that an up tick in retail sales means company earnings will rebound, don't count on it. In fact, the continued decline in computer prices shows that earnings will be squeezed for many technology companies for the foreseeable future.

Plus, there is another factor that will weigh on the stock market: Inflation. The producer price index jumped 0.9% in September. We told you last month that the August PPI didn't accurately reflect the rise in inflation. The August report, by virtue of bad timing, failed to show the impact of rapidly rising oil prices on producer prices. September's index shows that and more. The 0.9% increase surprised most analysts who only predicted a 0.5% increase in the index.

The price of essentials such as gasoline, heating oil, and food rose in September. Alan Greenspan will certainly be watching these numbers. Clearly, despite the interest rate hikes of the past year, inflation is still a threat. The Fed will not cut rates as Wall Street had hoped. Instead, the Fed will have to consider raising rates yet again.

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