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The Honolulu Advertiser
Posted on: Friday, September 16, 2005

Like jobless claims, retail prices likely to surge

By Martin Crutsinger
Associated Press

People left unemployed by Hurricane Katrina file for benefits in Baton Rouge, La. The Congressional Budget Office estimated that the storm wiped out as many as 400,000 jobs in the Gulf region.

RICKY CARIOTI | Washington Post

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WASHINGTON — Hurricane Katrina triggered the biggest one-week increase in jobless claims in nearly a decade, and analysts warn that's likely just the beginning of the bad economic news ahead as the nation starts paying for the most expensive natural disaster in U.S. history.

Consumers, already feeling the pinch at the gas pump, should be braced for price hikes for various products and services. Everything from food to furniture to shoes could start becoming more expensive as retailers pass on higher shipping costs to consumers.

"We are just starting to see the impact of Katrina. We are going to see awful inflation numbers, awful employment numbers and awful industrial production numbers for a few months," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm in Lexington, Mass.

Gas prices were rising even before Katrina, but they spiked immediately afterward because the storm caused widespread shutdowns of oil platforms, refineries and pipelines. Hundreds of thousands of people are out of work in the region, and the rebuilding effort is expected to take years and cost hundreds of billions of dollars.

The Labor Department reported yesterday that applications for unemployment benefits jumped by 71,000 last week, the biggest increase since the East Coast blizzard of 1996.

The government said 68,000 of those claims were hurricane-related, and analysts predicted that number would climb higher in coming weeks as more laid-off workers get around to filing claims and state unemployment offices process a backlog of claims already filed.

In other economic news, the Labor Department reported consumer inflation grew by 0.5 percent in August, after a similar jump in July. Both increases were driven by surging energy prices.

Economists said the September figure is likely to be worse, noting that gasoline reached its record high of more than $3 a gallon this month, and other fuel prices increased as well.

While gasoline prices have retreated a bit in recent days, pump prices for the first two weeks of September were up 30 percent from a month ago. Analysts said the increase could drive up the overall inflation number by as much as 0.8 percent in September, which would be the biggest one-month surge in 15 years.

Economists predicted that the so-called core rate of inflation, which excludes energy and food, would likely begin rising as well, reflecting that energy price pressures are beginning to spread to the rest of the economy.

So far, those increases have not shown up in the data. The core inflation rate was up just 0.1 percent in August, the fifth straight month in which it has barely budged.

Behravesh said that with airlines raising the cost of tickets to recoup higher jet fuel costs and with shipping companies adding on surcharges, the core inflation rate could be pushed as high as 0.4 percent in coming months.

If inflation pressures outside of energy do start rising, that could prompt the Federal Reserve to abandon its gradual quarter-point rate hikes for a more aggressive campaign to make sure inflation does not get out of control. The Fed meets Tuesday.

"If underlying inflation begins to percolate higher, that will mean we will have to struggle with rising prices and higher interest rates," said Mark Zandi, chief economist at Economy.com.

Such a development would raise the risks of a full-fledged recession, something that economists still rate as a low probability. They contend that the most likely outcome of Katrina will be a reduction of 400,000 jobs over the next four months and a slowdown in economic growth of perhaps a full percentage point.