Drop in Wholesale Prices of 0.6% in April Promises Lower Inflation in Summer

Times Staff Writer

Wholesale prices declined another 0.6% in April to their lowest level since November, 1983, the Labor Department reported Friday. For the first time in more than two decades, wholesale prices now have fallen for four consecutive months.

The drop reflects continued lower energy prices and, economists say, promises low or negative inflation at the consumer level for several months to come.

So far this year, the producer price index, which reflects wholesale prices, has plummeted at an annual rate of 11.1%, the steepest four-month decline since the index was established in 1947. Not since the four months ending in March, 1963, had prices for finished wholesale goods fallen for four straight months.

At the same time, the Commerce Department reported that new home construction increased 4.1% last month, reflecting lower interest rates and promising stronger growth in the economy generally. During April, the department said, housing starts stood at an annual rate of 2.01 million units, the fastest pace since 1978.

Lowest Operating Rate in 2 Years

In still another key economic report, the Federal Reserve Board said Friday that American industry operated at 79.3% of capacity in April, unchanged from March, with both months posting the lowest operating rate in more than two years.

The operating rate at U.S. factories, mines and utilities has fallen 1.5 percentage points since January, and the Fed said the weakness has come from a sharp slump in oil and gas production and further declines in manufacturing.

While economists generally believe that the big downward moves in oil and gas prices are over, there seems to be no likelihood of renewed inflation at the retail level for at least a few more months as the benefit of lower energy prices continues to work through the economy.

Gasoline prices fell 10.4% in April, less than the record 21.9% drop in March. And an April decline of 16.9% in crude oil prices promises still more benefits from the global collapse of oil prices last winter.

Wholesale food prices edged up 0.1% in April, but the index for crude food and feed grains fell 3.1%, another indication of lower prices later on for finished consumer foods. Only the prospect of massive grain purchases by the Soviet Union in the wake of the nuclear disaster at Chernobyl, in the heart of the Ukrainian breadbasket, would make higher food prices likely anytime soon, economists said.

Dorothea Otte, assistant director of the economic forecasting project at Georgia State University, noted that grain price futures rose in the wake of the Chernobyl incident. She predicted that growing global demand for grain could begin to pull the producer price index upward by 0.2% or 0.3% per month within a month or two.

"We're about at the end of the sequence of deflation," she said.

But Robert Gough, a senior vice president of the Massachusetts forecasting firm Data Resources, dismissed the prospect of higher food prices as "speculative, not substantive."

He noted that estimates of Soviet crop damage from Chernobyl have ranged from about 5% to a worst-case 20%.

"Even if it were 20%--so their import needs would double--that would put much less pressure on world markets than would have been the case a decade ago or even five years ago," Gough said. "Europe and India can now export grain, and most food demand around the world can be met internally."

The likely outcome, he said, is not much change in grain prices and "no windfall for the American farmer." So, while energy price declines work their way through the economy, it is still likely that wholesale prices could fall for another month or so, he said.

April's deflation would have been even more pronounced, Gough said, without what he termed the "unfortunate" decision by General Motors and other auto makers to capitalize on the weaker dollar and higher Japanese import prices by raising prices on some U.S. trucks and cars.

Car prices rose 1.6% and light-truck prices were up 1.8% for the month, contributing to a 0.3% increase in the broader category of capital equipment.

Except for the increase in auto and truck prices, said Allen Sinai, chief economist at Shearson Lehman Bros., wholesale prices for capital equipment would have been flat or down because "there is so little capital investment at present that all the pressure on business equipment prices is downward."

Sinai, like Gough, sees little chance of rekindled inflation for the next several months, with retail prices likely to register small declines for "two or three of the next four or five months."

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