Wholesale Prices Jump, Output Holds Steady; Auto Segment Blamed
A surge in automobile and food prices pushed wholesale prices up 0.9% in October, the largest such increase in more than four years, the Labor Department reported Friday.
But economists were quick to note that the significant rise in the monthly index--unmatched since a full 1% gain in April, 1981--merely offset large drops in August and September. Since the beginning of the year, wholesale prices have increased at an annual rate of only 0.9%.
Thus, the overall leap was “a statistical fluke,” said David Wyss of Data Resources, a Lexington, Mass., economics forecasting firm. He added that it could be explained primarily by a hefty 5.1% gain in car prices resulting from the discontinuing of financing discounts offered to consumers for end-of-the-model-year sales.
Keen Disappointment
The auto industry also was the key factor in a separate report issued Friday by the Federal Reserve Board, which found that industrial production showed no growth in October--a keen disappointment to analysts who had been led by employment gains to expect an increase for the month. The Fed blamed much of the lack of growth on the 12-day United Auto Workers strike at Chrysler, which was responsible for a 6% decline in auto assemblies.
But steep increases in wholesale meat prices, coupled with even higher increases in cattle and hog prices, portend higher food costs at all levels for the next few months, analysts said. While few predicted a return of inflation anytime soon, many said it appeared that the era of declining crude-goods prices might be over.
Taken together, both reports seemed to send a mixed message, economists said, predicting that economic growth likely will remain sluggish but that inflation also will remain under control.
In a third government report, the Commerce Department said Friday that U.S. business sales fell 0.5% in September, the first decline in three months, and inventories climbed by 0.2%, according to the Associated Press. The department reported that business sales totaled $428.5 billion in September following a 1.9% increase in August. It was the first decline since a 2.3% June setback. Inventories rose to $579.5 billion after falling 0.3% in August.
At the White House, spokesman Larry Speakes cautiously attributed the rise in wholesale prices to the unusual auto and food price indexes and concluded that “we still see no signs that the devastating double-digit inflation of the previous Administration should recur in the foreseeable future.”
Wyss said the food price increases--11.8% for beef, 9.9% for pork, 16.8% for cattle and 20.8% for hogs--indicated that “the oversupply on the food market is gone, so the consumer has seen all he’s going to of declines in food prices.”
But he noted that other price indexes for crude and intermediate goods were unchanged--a good indicator of only modest price rises in the near future. Wyss’ firm is forecasting wholesale price increases of 2.5% over the next 12 months, and “that’s pretty good,” he said.
As for the reported lack of growth in industrial production, Wyss agreed that the Chrysler strike was the primary cause of the problem.
“If you take cars out, you would have a continued moderate rise, in line with recent months,” he said “But that sluggish performance is not a good sign for fourth-quarter growth in 1985.”
Growth has crept along at a 1.8% rate so far this year, although the Reagan Administration had predicted a rate of 3% for the year.
Allen Sinai, chief economist at Shearson Lehman Bros., agreed that the industrial production report was disappointing and yet another “sign that the industrial side of the economy is under pressure.”
This was particularly so, he said, in view of an earlier Labor Department estimate that manufacturing jobs had jumped by 60,000 in October--a possible indication that the industrial downturn was ending. Because production was flat, those expectations will have to be revised downwards, Sinai warned.
“The message is that we continue to have a weak and depressed manufacturing sector,” he said. “The economy is in a no-man’s-land area between the seeds of improvement that have been established--a lower dollar, lower interest rates--and the actual improvement. For now, it’s weak and under pressure.”
As for inflation, he said, the huge wholesale price increase is “an aberration, not reflecting a return of inflation” because of the car and food price increases.
Secondary Message
But there is also a secondary message, Sinai said. “The impact of the declining dollar can be seen creeping in in the food and some crude material prices, “ he said. “The message is that commodity price deflation is over--and for some, that’s good news.”
Striking a similar theme, Richard Rahn, chief economist of the U.S. Chamber of Commerce, said: “I think we are seeing the end of the big price declines, which couldn’t last forever. But I don’t look at this as portending a big new spiral of inflation.”
About the report on inventories, Sinai said the gain could signal stockpiling of foreign goods by merchants concerned that the recent declines in the dollar will drive import prices up.
