Sept. 13 (Bloomberg) -- U.S. producer prices rose for a second month in August, boosted by record fuel costs that kept rising this month in the wake of Hurricane Katrina, a government report showed today.

The 0.6 percent increase in prices paid to factories, farmers and other producers followed a 1 percent jump in July, the Labor Department said today in Washington. The core measure, which excludes fuel and food, was unchanged in August, reflecting cheaper cars and computers. It rose 0.4 percent a month earlier.

``Energy prices were rising before Katrina hit, and while those costs didn't make their way through to finished goods in August, we have to expect higher core inflation in coming months,'' said Nigel Gault, director of U.S. research at Global Insight Inc., an economic research firm in Lexington, Massachusetts, before the report. ``Firms are saying that they've absorbed so much already that they have to pass on these costs.''

The 19 percent surge in energy prices over the last year has prompted some companies such as chemical maker DuPont Co. to pass those costs along to their customers. A separate survey of chief executives showed more are planning price increases in the next 12 months. Federal Reserve policy makers may raise interest rates for an 11th straight time on Sept. 20 to limit the threat of broader inflation, some economists said.

Economists were expecting a 0.7 percent rise in producer prices, based on the median estimate of 60 economists surveyed by Bloomberg News. Estimates ranged from increases of 0.4 percent to 1.2 percent. The core rate was forecast to rise 0.1 percent.

Prices submitted by survey respondents are effective on the Tuesday of the week containing the 13th day of the month, meaning Katrina was too late to affect producer prices in August.

Producer prices were up 5.1 percent for the 12 months ended in August compared with a 4.6 percent year-over-year gain the previous month. Core prices were 2.4 percent higher compared with a 2.8 percent year-over-year increase in July.

This Year

So far this year, producer prices are rising at a 4.3 percent annual rate compared with a 3.3 percent increase at the same time last year. Core prices are rising at a 2.2 percent annual pace, up from a 1.9 percent rate in the first eight months of 2004.

A survey released earlier today by TEC International, the world's largest organization of chief executives, showed that 54 percent of the 2,100 CEOs of small- to medium-sized companies said they plan to raise prices in the next year, up 8 percentage points from the previous quarter.

A third of the CEOs, surveyed Aug. 29 to Sept. 6, also said they expected economic conditions to worsen in the next 12 months.

Energy

Energy prices rose 3.7 percent last month after climbing 4.4 percent in July. The price of gasoline increased 9.5 percent, while the cost of natural gas rose 2.5 percent. The rise in the August index was limited by cheaper cars and computers.

Passenger car prices fell 1.3 percent in August, the biggest drop since July 2004, following a rise of 1.5 percent in July. Costs of computers fell 0.4 percent after a 2.1 percent slump.

Prices of materials used at the earliest stage of the production process, including scrap steel and timber, rose 2.3 percent after rising 6.7 percent in July. Excluding food and energy, core raw materials prices rose 4.6 percent.

The Journal of Commerce Index of 18 industrial materials, including steel, cotton and crude oil, rose to a record last week and is up 7 percent since Hurricane Katrina.

Intermediate Goods

Costs of intermediate goods, products that are partially finished such as lumber and steel, rose 0.7 percent after a rise of 1 percent in July. Excluding food and energy, intermediate prices fell 0.1 percent for a second month.

Food prices declined 0.3 percent for a second month, the Labor Department said.

Prices for capital equipment fell 0.1 percent following an increase of 0.5 percent. Besides a decline in computer costs, prices also fell for communications equipment, textile machinery and commercial furniture.

Hurricane Katrina swept through the U.S. Gulf Coast on Aug. 29, disabling drilling platforms and pipelines in a region that produces a third of the nation's oil and a fifth of its natural gas.

Crude oil futures on the New York Mercantile Exchange for the first two weeks of August averaged $63.55 a barrel, up from $59.54 a barrel during the same period in July. They jumped to a record $70.85 a barrel on Aug. 30.

Effect of Higher Fuel Costs

While companies facing stiff competition have been reluctant to risk losing market share by passing on higher prices, the most recent surge in energy costs may change that, some economists said.

DuPont, the third-largest U.S. chemical maker, said yesterday it plans to raise prices on its 35,000 products, including chemicals, seeds and specialty plastics, to recover record costs for energy and raw materials.

``The magnitude of the change is almost a supply shock,'' Marketing Officer Diane H. Gulyas said in a telephone interview. Increases in prices will vary widely, she said, declining to estimate an average. ``The reason we are taking these actions now is it's here to stay, it's broad-based, and it's global.''

Global selling prices have never been lower relative to costs for industrial chemicals, Wilmington, Delaware-based DuPont, said in a statement. Prices for crude oil, natural gas and refined petroleum products probably will remain close to records in the foreseeable future, Robert H. Shrouds, DuPont corporate economist, said in a report.

Federal Reserve

That may explain why traders are pricing in a greater chance of a Fed rate increase next week. The yield on October federal funds futures rose to 3.71 percent yesterday, putting the odds of an increase at 82 percent, up from 44 percent on Sept. 1.

Fed Bank of Chicago President Michael Moskow said Sept. 7 that while the storm may temporarily restrain growth, policy makers need to address inflation pressures with ``appropriate'' rate increases. The Fed has raised the overnight bank lending rate 10 times since June 2004, to 3.5 percent.

Janet Yellen, president of the Fed Bank of San Francisco, said last week that inflation is ``relatively well contained,'' while warning of ``uncertainties on the upside have only gotten bigger since Hurricane Katrina slammed into the Gulf Coast.'' Raising interest rates remains a ``probable scenario,'' Yellen said.

Peoria, Illinois-based Caterpillar Inc., the world's largest maker of earthmoving equipment, said Sept. 6 that it will raise prices as much as 5 percent next year as mining companies buy excavators and trucks to meet growing demand for copper and coal.

`Feel the Pain'

``Short term, we're going to feel the pain of Katrina, with prices going up and costs going up faster than we can recover them,'' said J. Brian Ferguson, chief executive of Kingsport- Tennessee-based Eastman Chemical Co., the world's largest maker of plastic for beverage bottles. He made the comment in a Sept. 7 interview.

Accelerating labor costs are also a concern for the Fed. The Labor Department said last week that labor costs increased 2.5 percent from April through June and were up 4.2 percent from a year earlier, the biggest rise since the third quarter of 2000.

Still, economists including Stephen Roach at Morgan Stanley said further increases in borrowing costs may aggravate any slowdown in the wake of Hurricane Katrina. Economists in a Bloomberg survey following the storm trimmed third-quarter growth forecasts by half a percentage point.

Yellow Roadway Corp., the biggest U.S. trucking company, last week cut its third-quarter profit forecast, in part because of the impact of Katrina. Overland Park, Kansas-based Yellow Roadway and other U.S. truckers have had shipments disrupted in Louisiana and surrounding states as a result of the storm.

To contact the reporter on this story: Joe Richter in Washington jrichter1@bloomberg.net.

Last Updated: September 13, 2005 08:30 EDT