Wholesale Prices Post 0.6% Rise : Biggest Increase in 11 Months Spurs Fears of Inflation
The nation got its first big dose of inflation this year as wholesale prices rose 0.6% in March, the largest increase in 11 months, the government said Friday. The report sent new tremors through financial markets already shaken by a worsening U.S. trade deficit.
The increase in the Labor Department’s producer price index more than erased the 0.2% decline in February. If the index continued to increase at March’s pace for 12 months, the annual inflation rate would be 7%.
Falling energy and food prices that had been keeping a lid on inflationary pressures shot upward in March, as did wholesale prices for a wide market basket of other consumer goods and capital equipment.
The price data provided the follow-up blow in a one-two punch that government statisticians delivered on the state of the economy.
Deficit Expanded
On Thursday, the Commerce Department reported that the nation’s trade deficit expanded by $1.4 billion in February--to $13.8 billion--when all predictions had called for it to narrow.
The Dow Jones Industrial Average of 30 blue-chip stocks dropped 101 points on the news--its fifth-biggest decline in history--but the stock market appeared to have stabilized Friday and returned to plus territory by late in Friday’s session.
“I do not know that the markets are going to digest two doses of really quite bad medicine too quickly,” said Donald Straszheim, chief economist for Merrill Lynch & Co..
“The trade number is easier to explain away because it bounces up and down, but not the price figures,” Straszheim said. “The 2% and 3% (annual) inflation we have been enjoying--we probably will no longer.”
White House spokesman Marlin Fitzwater said the Administration was disappointed by the increase in wholesale prices and the trade deficit.
Pressure to Worsen
“We think the market has overreacted to a one-time report and we hope this thing will stabilize,” he said.
But analysts said upward pressure on prices is only going to worsen in the months ahead, stirring speculation that the Federal Reserve Board might tighten credit to both dampen inflation and prevent the dollar from losing further value.
The Fed last raised the discount rate it charges for loans to banks in September, 1987. A month later the stock market collapsed with the Dow Industrials dropping 518 points, partly in reaction to higher interest rates from the credit tightening.
Lawrence Hunter, an economist for the U.S. Chamber of Commerce, expressed fears Friday that the Fed will “overreact to perceived inflationary pressures that some see in the recent data” and stymie economic growth
“Oversteering in the face of monthly price swings can only feed fears of inflation,” Hunter said, referring to figures that show the annual wholesale price increases of just 3.1% when averaged over the last three months.
However, Donald Ratajczak, a Georgia State University economist who specializes in wholesale price trends, said increases in April will match, if not exceed, those in March.
“This is not a one-month aberration,” Ratajczak said. “Strong increases in raw material prices that have been going on for six months are widening and spreading. It’s not runaway inflation, but it’s a little worrying.”
Oil Prices Jumped
Wholesale energy prices, which had dropped at an annual rate of 17% since last August, shot up 0.9% in March. Gasoline prices climbed 1.5% last month after dropping about 9% since November. And home heating oil prices jumped 2.6%.
Food prices, after dropping 1.1% in February, advanced by 0.7% in March. For the first three months of the year, beef and veal prices have climbed 43.6%.
Reflecting the broad nature of March’s price gains, the Labor Department said its index of wholesale prices for consumer goods other than food and energy rose 0.4%, compared to a 0.3% increase in February.
For the first three months of 1988, those non-energy, non-food wholesale prices are up at an annual rate of 5.7%.
Drug Prices Rose
Automobile prices were up 1% last month, restoring them to the level they had been at in November before manufacturers began offering rebates and other incentives.
Prescription drug prices rose 1.3%, over-the-counter drugs were up 2%, and the price of newspapers climbed 1.4% in March. Other goods showing 1% or greater price increases one step short of the retail level included carpeting, draperies and jewelry.
Capital equipment prices rose 0.4%, double the increases of January and February. The biggest price gains--above 1%--were in metal-cutting machine tools and office and store equipment.
In a related report, the Commerce Department said Friday that businesses planned to increase their capital spending by 8% this year after raising it by only 1.7% in 1987.
Increasing Optimism
The commerce report reflected increasing optimism about the economy among businessman who, when last surveyed in December, said they planned to increase their capital spending by 7.3% this year.
Meanwhile, the Federal Reserve reported that industrial production edged up just 0.1% in March. Analysts said that report was the only indication that the economy is not overheating after a long string of data suggesting that it is.
As for wholesale prices, the March gain brought the producer price index to 106.2. That means a selection of goods costing $100 at the wholesale level in 1982 would have cost $106.20 last month, or 30 cents more than in February.
Wholesale prices rose only 2.2% for all of 1987. The index, however, does not include two categories where price increases have been more pronounced in recent months--services and imports.
Those two categories are included in the consumer price index, which rose 4.4% last year.
Consumer prices for the first two months of 1988 were running at an annual rate of 3.2%. Figures on retail price activity in March will be released later this month.
