Historic Drop in Wholesale Prices Led by Food, Energy

With cheaper food and energy prices leading the way, wholesale prices plunged 1.6% in February in the largest monthly decline since the government began keeping the statistic in 1947, the Labor Department said Friday.

In a separate report Friday, the Federal Reserve Board said that the decline in oil and natural gas drilling and sagging defense orders dragged output at the nation’s factories, mines and utilities down 0.6% in February.

The dip in the industrial production index followed a 0.1% increase in January, according to revised figures compiled by the Fed. A preliminary report last month had charted a 0.3% rise in January.

Production rose by a healthy 0.8% in November followed by a 0.8% rise in December, according to the revised figures. The February decline was the first since October, 1985, when industrial output also fell by 0.6%.

The seasonally adjusted index has advanced by a slim 1.6% since February, 1985.

The record drop in wholesale prices followed an unusually large January decrease of 0.7% in the producer price index, the government’s main measure of wholesale prices. If the two-month decline continues and is calculated at an annual rate, wholesale prices will decline at a 1986 rate of 17.1%.

“This decline in prices at the wholesale level will send a strong message to the overall economy: Consumer prices are coming down--and the fears of inflation have all but abated,” White House spokesman Larry Speakes said.

“With interest rates falling and inflation clearly under control, expectations for a strong second quarter are high,” Speakes said. “We expect to see every segment of American society enjoying this fourth year of the Reagan economic recovery.”

Craig Howell of the department’s Bureau of Labor Statistics said the 1.6% drop in the price of finished goods “is the largest decline on record.” Records were set in a number of areas, he said, with finished energy goods and crude energy both posting record declines

“I think this is being passed along pretty rapidly,” Howell said of the lower energy prices. “I expect this will have an impact on the consumer price index in the near term.”

Gasoline Prices Down

Gasoline prices dropped 11.1% in February, while the cost of home heating oil plunged 26.2%.

Food prices also plummeted, with the cost of fresh and dried vegetables down by 23.2% and eggs off 10%.

Even without the huge drop in energy and food costs, wholesale prices did not increase last month, the department said.

Overall, food costs fell last month by 1.6%, with prices for beef, veal, pork, vegetables and eggs falling even more than they did in January. The cost of cooking oil and shortening also fell but prices for coffee and soft drinks continued to rise. Coffee was up 6.3% last month, the report said.

Seasonal Adjustment

Due to the rapidly falling price of oil, energy costs “are now back to the levels that prevailed in 1979 or 1980,” the department said.

Before seasonal adjustment, the producer price index for finished goods decreased by 1.3% last month to 292.3. That means it took $292.30 last month to buy what $100 could have purchased in the index’s base year, 1967.

In the last 12 months, the finished goods price index fell 0.1%, the cost of finished energy goods dropped 8%, consumer goods other than food and energy rose 2.2% and capital equipment prices climbed 1.7%.

Among items that rose in price last month were tobacco products, women’s apparel, cars, books and newspapers.

Of the drop in industrial production, Robert Wescott of Wharton Economics said: “I think it’s a disappointing story for February, but it wasn’t all that unexpected because we knew employment was weak and the hours worked was weak.”

But Wescott joined Administration analysts in predicting increased output later in the year as the effects of cheap oil, low inflation and reduced interest rates combine to stimulate the consumer sector.