Wholesale Prices Fall a Record 1.6% : Drop, Biggest Ever Recorded, Linked to Plummeting Costs of Fuel and Food
This winter’s collapse in global oil prices drove down wholesale prices in the United States by 1.6% in February, the largest monthly drop ever recorded in that index, the Labor Department said Friday.
At the same time, the Federal Reserve Board reported that a steep decline in oil, gas and coal extraction--another result of the free fall in energy prices--tipped industrial production for the month into a relatively severe 0.6% decline.
Economists expected a drop in the producer price index but were surprised by its size. However, they expressed disappointment in the slump in industrial production, which--along with February’s rise in unemployment to 7.2%--provided evidence that the economy has not shaken off the weakness that overtook it late last year.
Yet, the price declines were also seen as insurance against resumption of inflation any time soon and as a welcome harbinger of faster growth later in the year.
Food Prices Down 1.6%
Food prices, which had increased last fall, were down a substantial 1.6%.
If the food and energy price declines were removed from the index, wholesale prices for all other finished goods would have been unchanged for the month.
The major cause of the surprising decline was the sudden and steep drop in the world price of oil, from more than $30 a barrel during a brief energy price increase last fall to about $13 by the end of February. Home heating oil was down an astonishing 26.1% for the month and 24% since February, 1985. Gasoline prices were down 11.1% for the month and 6.8% from a year ago.
“We expect those prices to begin to firm in another couple of months,” said Donald Ratajczak, director of the Economic Forecasting Project at Georgia State University in Atlanta. “Fuel oil won’t fall another 26%, though gasoline may have another big step down. March should be another down month in producer prices, but it won’t be another record. As we get into spring, all of the fuel drops will have worked their way into the index, and prices may start up again.”
Ratajczak added that the declines in wholesale prices would almost certainly drive down retail prices.
“There’s no question that we’re going to see several months of negatives in the (consumer price index),” he said. “It could be (down) as much as 0.4% next month, and there is a favorable outlook into the future.”
Robert F. Wescott of Wharton Econometrics in Philadelphia pointed out that the impact of lower energy prices “is pervasive in the economy, with an impact on manufacturing costs across the board and reaching out to wholesale and retail trade, apparel and so forth. It will certainly generate higher profits in all energy-intensive industries.”
But David Wyss of Data Resources Inc., whose Lexington, Mass., forecasting firm has been consistently among the more pessimistic predictors of economic performance this year, found the production figures disquieting.
The big drop in oil and gas exploration was to be expected in the current energy price slump, but “production was weak even without that,” he said, noting that production indexes for durable and non-durable goods were negative. “Autos showed the only strength in the whole index, and that is going to reverse in March. Everything else looks soft.”
In a separate report Friday, the Commerce Department said that retail inventories jumped a steep 2.9% in January, and wholesale inventories were up 1.4%. Those increases are an all-but-certain harbinger of still more production weakness in March.
The Fed reported that auto assemblies for February increased to an annual rate of 8.4 million units, seasonally adjusted, an increase of 300,000 units.
“That’s also bad news,” Wyss said, pointing out that the backlog of unsold cars jumped 3.9% in January. “They are producing more cars than they can sell, so we expect another weak month in industrial production (in March) while they try to correct that inventory overhang.”
