Oct. 14, 2005--Inflation surged in September by the sharpest rise in 25 years, as back-to-back storms and high energy costs continued to drag down consumer confidence in the economy, a slate of economic reports showed Friday.

Despite resilient optimism among small business owners, rising prices and the outlook for energy-cost increases "is not favorable," according to a National Federation of Independent Business survey released Tuesday. It expects more small firms to begin passing on rising costs to costumers.

Hurricane Katrina, which slammed into the Gulf Coast region on Aug. 29, followed by Rita just weeks later, caused "uncertainty about the near-term economy," said NFIB chief economist William Dunkelberg. Yet the full economic impact won't hit most small businesses until winter weather arrives and brings higher energy bills and higher prices, he said.

Already last month prices jumped by 1.2%, after rising just 0.5% in August, the Labor Department reported Friday. The increase, sparked by a record 12% rise in energy prices, was the largest month-to-month gain since March 1980.

Excluding energy and food prices, which tend to fluctuate more than others, so-called core prices rose just 0.1%, the department said. Overall, prices were up 4.7% from the previous year, with core prices up 2%.

The department's monthly consumer price index is based on collected prices of food, clothing, shelter, fuel, transportation fares, drugs, charges for doctors' and dentists' services, and other goods and services for day-to-day life in 87 urban areas across the country.

Among those sectors, apparel, down 0.3%, was alone in posting lower prices, the index showed. According to market analysts, the prolonged summer heat kept shoppers away from fall clothing lineups, forcing stores to offer discounts.

On a whole, retail sales last month rose 0.2%, after dropping 2.1% in August, the Commerce Department said Friday.

Economists had expected an increase of 0.5%, resulting from bigger gains at the pumps, where gasoline prices hovered around $3 per gallon. Excluding sales of both gas and cars, which dropped off with the end of employee discount offers in August, retail sales were up 0.6% last month.

But if consumers are spending again, they feel none too good about it. So far this month, consumer confidence has sunk to a 13-year low, down for the third consecutive month, according to the University of Michigan's preliminary index.

The University's mid-month gauge of consumer sentiment, based on a phone survey of some 300 households, was 75.4, down from a 76.9 final reading in September and well below Wall Street forecasts. Last month's reading was the lowest since October 1992. Before the storms hit, the average reading was 92.3.

Also down was the survey's expectations index, to 62.4 from 63.3, and current conditions index, to 95.7 from 98.1, according to the survey.

Despite the gloom, small businesses were continuing to report higher sales, buy new equipment and expand facilities last month, the NFIB survey showed.

The group's monthly optimism index, based on survey responses from about a quarter of its 600,000 members, stood at an even 100, nine-tenths of a percentage point below the previous month.

Those businesses polled added an average 0.14 employees per firm, unchanged from July and August. Nearly two-thirds reported capital outlays of a median $25,000, with some 31% holding to expenditure plans for the second half of the year. Only 32% reported lower earnings, citing weaker sales, materials costs, price reductions and insurance costs.

"Overall the survey indicates that the economy should continue to grow at about the same pace seen all year, solidly over 3 percent," Dunkelberg said.