Wholesale prices increased 0.4% in April after an 0.8% jump in March, the Labor Department said Friday, a sign that moderate inflation is again becoming a way of life.
Concerns about a steep jump in inflation are tempered by the fact that half of last month's increase in the producer price index was caused by energy prices, which recorded their sharpest rise in more than a year, but which have since declined.
Because Friday's report was no worse than expected, bonds and stocks rallied moderately, recovering somewhat from inflation fears instilled by last week's report that unemployment had fallen to a 14-year low of 5.4% and this week's evidence that the Federal Reserve is pushing up interest rates.
Without the volatile components of energy and food, wholesale prices for all goods were up only 0.1% and wholesale prices for consumer goods were unchanged. Energy costs were up 3.1% in April, and food prices rose 0.4%, after increases of 0.8% in March and 2.3% in February.
However, a major reason that the increase for all goods other than energy and food was only 0.1% was a one-time 0.5% drop in new-car prices.
In addition, some analysts say, worse news may be down the road. Prices for crude goods increased 1.3% in April, and intermediate goods spurted 0.8%, the fastest such increase in more than a year.
Rise in Consumer Prices
Both of these categories mean more inflation later on at the wholesale level--and all these price increases will eventually show up in the consumer price index, which measures what Americans actually pay at the retail level. The Labor Department's report on April's consumer prices is to be issued next week.
Among economists, the consensus was that, although securities markets are probably hypersensitive to monthly reports, the longer-term outlook is that inflation is returning.
"It's true the price index looks better if you take out food and energy," cautioned Stacy Kottman of the economic forecasting project at Georgia State University, Atlanta, which specializes in price movements. "But you've got to remember that food and energy price increases are real increases that people have to pay."
Taking an opposite view of the same data, Michael Penzer of Bank of America in San Francisco calculated that, with food and energy excluded, the "core inflation" of the last two months of nominally higher wholesale prices has run at an annual rate of 3.2%. During the previous six months, when energy prices steadily declined, the "core inflation" ran at an annual rate of 2.8%.
His verdict: Inflation is increasing, but slowly.
"When you cut through everything here, it's really an energy price story. And energy prices started to level off this month," Penzer said. "Back in the '70s, it took the markets 15 years to understand that the U.S. economy was becoming fundamentally more inflationary. Now, it may take another 15 years to realize that it has become less inflationary."
Roger Brinner of Data Resources Inc. in Lexington, Mass., agreed that securities markets have become too fixated on short-term data, but he concluded that a bout of higher--but not catastrophic--inflation is inevitable.
"I'm a medium-term pessimist, in that I expect (annual) inflation rates of 5% across the board by 1990," Brinner said. "But the markets see a strong employment number and they see 5% inflation tomorrow.
"It used to be that, when inflation began to heat up a little, the Fed would tighten short-term rates and nothing much more would happen," he said. "Now, with amateur-hour traders reacting to one-month data, the rates on 30-year maturities go up, too. The positive aspect here is that Fed actions have a much quicker impact."
Donald Straszheim of Merrill Lynch, New York, said: "I think the fears about higher inflation are not just imagination. By the end of this year, we could be seeing producer prices and consumer prices rising at an annual rate of 5% or 5.5%. It's not disaster, but the days of 3.5% inflation are over for this cycle."
Before seasonal adjustment, the producer price index rose 0.7 of a point, or almost 0.7%, to 106.9 in April, from a base of 100 calculated from price levels in 1982. Accordingly, a basket of wholesale goods that cost $100 six years ago is now estimated to cost $106.90.