Wholesale prices fell for the third month in a row in March, the Labor Department reported Friday, dropping by 1.1% on the heels of another big fall in energy prices.
The decline in the producer price index, not quite as large as February’s record plunge of 1.6%, left wholesale prices 1.4% below the March, 1985, level.
For the first three months of the year, wholesale prices fell about 3.3%, and economists predicted that they should continue to decline for a another month or two as the oil price collapse that began at the end of 1985 makes its way through the economy.
The quarterly drop in wholesale prices equates to an annual decline of 12.4% and is the steepest since the government started compiling the index in 1947.
“We’re going to see prices falling a while longer as the lower energy costs reverberate through the indices,” said Allen Sinai, chief economist at Shearson Lehman Bros. in New York. “Even after prices start rising again in the second half, this year will clearly be lower compared to 1985.”
Retail sales fell in March by 0.8%, providing further evidence that consumer spending remains relatively sluggish. But the weakness was concentrated in auto and gasoline sales, suggesting that the economy is picking up the pace from the nearly flat quarter at the end of 1985.
And, instead of the declines in retail sales originally reported by the Commerce Department for the two previous months, the latest revisions show gains of 0.1% in February and 0.4% in January.
‘Extra Money in Pocket’
“A lot of (analysts) are misreading these reports because they’re not used to declining prices. The nominal figures mask the underlying strength,” said Donald Ratajczak, chief economic forecaster at Georgia State University in Atlanta. “And it will be more obvious soon because the consumer is driving around with extra money in his pocket, but he hasn’t yet realized it.”
An unprecedented plunge in gasoline prices was the catalyst for the wholesale price decline. Gasoline prices fell a record 21.9% last month after an 11.1% decline in February.
Other energy prices also were down. Heating oil prices fell 6% after plunging a record 26.2% in February. Prices for natural gas, which competes with oil among many industrial users, fell slightly, by 0.6%.
But, excluding energy prices, wholesale prices rose 0.5%, pointing to modest inflation outside the energy sector. Automobile prices, for instance, rose for the second month in a row, increasing by 0.2% after a 0.4% gain in February. Indeed, some economists believe that the price level could bounce back sharply once oil prices level off.
If depressed energy prices move up modestly, argued Mike Evans, president of Evans Economics here, “we’re going to see some surprising inflation numbers in the second half of the year. All those bond traders who think inflation is licked forever may be in for a surprise.”
Most economists, however, are convinced that the current absence of inflation is likely to spur the Federal Reserve to push interest rates lower to help stimulate the economy.
“The stage is set for another discount rate cut, even if other countries don’t move,” said A. Gary Shilling, who runs a New York economic consulting firm under his own name. “You’ve got zero inflation, a sloppy economy and fears about the Texas banks. We clearly need another round of monetary easing.”
The apparent weakness in the economy was reflected in the drop in retail sales. But a more careful look suggests that consumer spending may be somewhat stronger than believed. Without the 3.4% decline in auto sales last month, retail sales would have been level in March. Because prices were falling, sales were actually up in real terms.
Gains in Retail Sales
According to the preliminary figures, sales at the retail level advanced 1.2% during the first quarter over the last quarter of 1985 and were 5.1% above the same period last year.
Among department stores, the Commerce Department reported a 1.2% increase for March over February, when department store sales registered an even larger 1.9% gain.
Dragging down the expansion of overall retail sales, however, were declines in sales of autos and gasoline. Consumers are holding back from car buying, analysts said, in anticipation of another round of below-market financing incentives from auto makers.
Gasoline sales plunged a record 5.9%, but that reflected falling prices rather than a drop in purchases.