Producer Prices Fall for 1st Time Since July, 1986

Lower prices for food, energy and capital equipment unexpectedly reduced wholesale prices in October by 0.2%, the first such monthly decline since July, 1986, the Labor Department reported Friday.

Economists cautiously welcomed the report as further evidence that fears of inflation--which were rising before the Oct. 19 stock market crash replaced them with fears of recession--were unfounded.

But they cautioned that the reported price decline may have been caused partly by understating auto prices as part of a seasonal adjustment applied by the department to compensate for a sharp rise in new-vehicle prices as next-year models are introduced.

Food prices declined 0.1% after a steep 1.1% increase the month before, and energy prices, driven mostly by a big drop in natural gas prices, fell 1% after a 3.7% drop in September.

Thanks to sharp drops in the adjusted prices of cars and trucks, producer prices for finished capital goods fell 0.4% after a 0.7% increase in September. Perhaps more significant, producer prices for all finished goods except the volatile food and energy components dropped 0.2% in October, compared to a 0.6% increase the month before.

“The message right now is that inflation is not a big problem,” said Martin Mauro of Merrill Lynch in New York.

Higher Prices Forecast

Mauro noted that expectations had been for price increases of up to 0.2% for the month, and he cautioned that moderately higher prices are likely in the future. He said that prices for crude goods, up 0.2%, resumed their yearlong rise and that intermediate goods--such as milled flour, compared to grain and baked goods--increased 0.5%.

Other economists were skeptical about the report. Donald Ratajczak, director of the Georgia State University economic forecasting project and a specialist in price movements, suggested that the unexpected decline in wholesale prices may have been caused by an excessive adjustment in the costs of new trucks and autos. “There is still inflation out there,” he warned.

In Friday’s report, the raw data showed that new car prices jumped 9.7%. But that figure, adjusted for what Labor Department analyst Craig Howell said was the historically predictable annual price increase for new models, was reported at 1.6%.

Adjusted Prices

Similarly, although prices for new light trucks increased 8%, the adjustment registered a price decrease of 1.6%. And prices for heavy trucks, down 3.5%, were adjusted downward still further to a decline of 4.2%

The producer price index, from which the Labor Department computes monthly price changes, rose by 1.5 points, or 0.5%, to 298.2 in October. The index is developed from a base of 100 in 1967, meaning that a selected cross-section of wholesale goods costing $100 in 1967 now costs $298.20. By this measure, the same goods would have cost $296.70 in September.

Auto Prices Cited

The good inflation report this time “had a lot to do with auto and truck prices,” Kathleen Cooper, chief economist with Security Pacific National Bank in Los Angeles, said. “No one expects to see inflation continue close to this low level, but it was good to see a low level.”

During the last 12 months, wholesale prices increased 2.6%, but intermediate goods prices went up 5% and crude prices jumped 9.8%. Taken together, Cooper suggested, inflation at both the wholesale and retail price levels could be expected to run between 4% and 5% in 1988.