Wholesale Prices Up 0.6% in May; Factory Output Drops
Wholesale prices jumped 0.6% during May, ending a streak of four straight monthly declines, as oil prices recovered from an extraordinary plunge, the Labor Department reported Friday.
However, economists have little fear of a serious resurgence in consumer prices and expect retail costs to rise at an annual rate of 2.5% to 3% this year.
Inflation apparently does not pose a major threat in the current uncertain business climate. Instead, there is greater fear about the seemingly stalled economy and rising unemployment. The output of the nation’s factories, mines and utilities fell 0.6% in May, the third decline in the last four months, the Federal Reserve Board said Friday. Industrial output is barely higher than it was a year ago.
The sole encouraging note was a report that total sales, covering transactions by manufacturers, wholesalers and retailers, rose 1.4% during April. But the ultimate customers, the retail consumers, are reluctant spenders these days. A preliminary report on retail sales disclosed a decline of 0.1% during May.
“The main problem we have is not inflation but that the economy is much more sluggish than it ought to be,” said John M. Albertine, vice chairman of Farley Industries, a Chicago-based diversified manufacturing company whose products include boots, underwear and batteries.
The increase in wholesale costs was seen to have been inevitable, ending a period in which petroleum prices virtually collapsed.
Richard B. Hoey, chief economist for Drexel Burnham Lambert, a New York investment banking firm, said: “There was a rebound from a deeply depressed level. The plunge is over, but it does not signal the start of a brand new round of inflation.”
May’s price spurt compared to a decline of 0.6% during April in wholesale costs. They had fallen by an average of 1% monthly this year.
The government’s calculation of wholesale costs, formally known as the producer price index, foreshadows by several months the prices that consumers will pay in retail stores. The May surge was led by energy prices, which climbed 2.7%, primarily because of an 8.6% leap in gasoline prices. Food costs rose 1.1%, with the price of beef, veal, eggs and fresh fruits all rising. But shoes, fish and baked goods cost less.
Prices rose for women’s clothing, drugs and home electronics equipment. Men’s clothing was unchanged in price, while apparel for children cost more.
“This does not indicate at all we are about to see any resurgence of inflation,” Albertine said.
“It was inevitable that energy prices would bottom out and start to creep up again,” said Arthur Levitt Jr., chairman of the American Stock Exchange. Excluding energy and food, he said, the price of other goods rose “only 0.2%, and I am sanguine about modest inflation for the rest of the year.”
The producer price index hit 289 in May. This means that a selection of goods that cost $100 in 1967 was priced at $289 last month. Despite May’s rise, the index is lower than the 294.20 of a year ago.
The precipitous drop in oil prices is the prime cause of lower wholesale prices this year. Energy costs in May were 28.6% below their level a year ago.
Food prices, meanwhile, were 2% above the May, 1985, level, and the cost of other consumer goods--excluding energy and food--climbed a moderate 2.5%. Thus, the savings from oil were more than enough to overcome the slight rise in prices for food and other goods.
Slack in the economy, with spare producing capacity in factories and a relatively high unemployment rate, should prevent a revival of inflation, analysts said.
Economic activity is relatively uninspired despite April’s rise in sales of 1.4%, the biggest gain since an increase of 1.5% last August. Most of the impetus in April came from a strong showing by manufacturers, who are cutting inventories.
Sales performance, however, was far less robust for wholesalers and retailers. Retailers’ inventories climbed by a hefty 0.8% in April. Unless consumers step up their buying, retailers could cancel some orders.
