Production Up as Wholesale Prices Dip 0.7%
Wholesale prices plunged 0.7% and industrial production continued to improve last month, the government reported Friday, raising the curtain on what many analysts are now predicting will be a very strong economy in 1986.
The sudden drop in world oil prices, combined with lower food costs and cheaper auto financing, caused the steepest decline in the producer price index in three years. Collapsing oil prices, analysts said, are overwhelming the relatively modest inflationary pressures from the year-long decline in the value of the U.S. dollar that has recently contributed to a boost in the price of imports.
At the same time, the declining dollar, which made U.S. goods cheaper in competition with foreign products, helped American factories, mines and power plants chalk up their third straight month of solid gains. Industrial production rose 0.3% in January after a strong rebound of 0.8% in November and 0.7% in December from the anemic levels registered earlier in 1985.
“For the time being, we’re getting the best of both worlds,” said Irwin Kellner, chief economist at Manufacturers Hanover Bank in New York. “There has been an increase in demand for U.S. production without the higher prices that we would normally expect from a drop in the value of the dollar.”
The January decline in wholesale prices left the producer price index just 1.4% higher than it was a year earlier. And many economists--both in and out of government--suggested that the drop in prices at the wholesale level could translate soon into lower consumer prices, with inflation remaining under control for much of the year.
“We are just beginning to scratch the surface on the good news on inflation,” said Robert Ortner, chief economist at the Commerce Department. “Inflation, instead of picking up because of the drop in the dollar, may very well slow down some more because of the drop in oil prices.”
Private economists have begun to revise their inflation projections downward as well.
3% Inflation Seen
“The first half of the year could see consumer prices up by less than 2%--and we will probably see actual declines for the first couple months of the year,” said Donald Ratajczak, director of the Georgia State University economic forecasting unit in Atlanta. “Instead of the 4% increase we expected earlier, it looks like inflation in 1986 may be around 3%.”
The only discordant note in the general chorus of falling prices was a sharp jump in the cost of coffee, which soared by 17.4% last month after a 3.1% increase in December. A drought in Brazil is getting the blame.
Food prices in general, however, fell by 0.4% last month after rising by 0.7% in December.
In its report, the Labor Department said that energy prices at the wholesale level dropped by 4% overall in January, with heating oil costs falling 10.8% and gasoline prices charged by refiners down by 5.7%.
Tumbling Oil Prices
Last month’s decline in wholesale prices was the first drop since September and it followed a 0.5% increase in December.
Crude oil prices on the spot market began to tumble late last year after Saudi Arabia and other Arab oil producers decided to boost production to prevent other oil nations from taking over a larger share of the world market. The collapse of spot prices, however, was not expected to show up so quickly at the wholesale level.
“We knew that oil prices were going to come down. It was hardly a surprise,” said David Wyss, an economist at Data Resources Inc. in Lexington, Mass. “The surprise was that it showed up in the January figures.”
Separately, the Commerce Department estimated that business inventories in December were virtually unchanged, while sales increased 1%. With inventories at relatively lean levels, analysts suggested that manufacturers will be under growing pressure to increase production to rebuild their stocks, adding a further kick to the economy this year.
Gain in Housing Starts
The Federal Reserve reported that increases in industrial output were particularly large for consumer goods and construction materials. Production of consumer goods rose by 0.9% after a 1.1% gain in December. Construction supplies were also up by 0.9% after a modest 0.1% gain in December, reflecting a recent pickup in housing starts.
The production of defense and space goods, which fluctuates widely, dipped by 0.2% after registering no change in December. Oil and gas drilling, which has been falling since the beginning of last year, gained in January, but few analysts expected the slump in the industry to end soon. The output of utilities was up by 0.2% after a 0.4% gain in December.
