Drought Boosts Food Costs, but Energy Prices Drop

The worst drought in three decades began to push up food prices last month but declining energy costs helped keep wholesale inflation growth at a moderate 0.4% in June, the government reported Friday.

The producer price index rose an annual rate of 4.6% last month to bring wholesale price increases in the first six months of the year to 3.6%, according to the Labor Department’s Bureau of Labor Statistics.

While energy costs fell 1.6% last month, consumer food prices rose 1.1% and have increased at an annual rate of 7.7% in 1988.

“The drought had a moderate impact,” boosting prices for such items as poultry, eggs and pasta, said economist Stacy Kottman of the Georgia State Economic Forecasting Center in Atlanta.

“We’ll have more drought influence (on prices) in the July report,” Kottman said.

Meanwhile, the Commerce Department reported that the trade deficit in May was the second-smallest in almost three years. That good news sent the dollar soaring on foreign currency markets.

The nation’s winter wheat crop--now mostly harvested--has not been damaged by the drought that has scorched much of the nation’s Midwestern and Southern farm areas. But the Agriculture Department projects that the drought will cut overall grain production by one-fourth this year, adding 1% to 2% to consumer food prices.

Wholesale inflation last month, however, was not dramatically different from producer price index increases of 0.5% in May, 0.4% in April or 0.5% in March.

All figures were adjusted for seasonal variations.

The index is considered a major indicator of inflationary pressures. Chairman Alan Greenspan of the Federal Reserve Board said Wednesday that he would be carefully monitoring commodity food prices and other factors, especially wage increases, to determine if stronger measures will be needed to keep inflation under control.

David Wyss, chief financial economist for Data Resources Inc. in Lexington, Mass., said the June wholesale price report was not especially alarming.

“It’s an early warning signal of inflation, but there’s nothing obvious there yet,” Wyss said. “It indicates that inflation remains, for the time being, pretty moderate.”

Consumer Goods Up

Consumer wholesale goods increased 0.4% last month, about the same as in each of the previous three months.

In the food index, the 1.1% increase followed a hike of 0.9% in May. Price increases accelerated for beef and veal, eggs, fish and pasta. Prices also rose after falling in May for fresh fruits, shortening and cooking oils, and processed turkeys.

Prices also were up for processed chickens, bakery products, dairy products and roasted coffee.

Prices turned down after rising in May for pork and fresh and dried vegetables.

The good news on the trade deficit came despite a slight increase in the actual figures. The government said the gap between imports and what America sells overseas widened slightly--by $627 million, from a revised April imbalance of $10.3 billion.

The revised April trade deficit was the best showing since a $9.9-billion deficit in August, 1985, and the May figure the second-best.

White House spokesman Marlin Fitzwater called the trade report “good news in the continuing trend of reducing the international trade deficit.”

Financial markets, which have been thrown into a tailspin by bad trade figures over the last year, reacted favorably to the news. The dollar rose almost one cent against the British pound and nearly one cent against the Japanese yen in London trading immediately after the trade figures were reported.

Improvement Shown

Jay Goldinger, an analyst with Capital Insight, a Los Angeles investment firm, said the slight widening in the deficit for May had been expected because the April number was held back by an unusually low import figure. He predicted that the trade deficit will move into single digits in coming months as the country’s trade problem continues to show improvement after seven consecutive years of steady deterioration.

“After the last few months of volatile movements, it was nice to see only a small change,” he said. “We should have smooth sailing for the rest of the year.”

Imports did rise in May compared to April, climbing 3.4% to $37.6 billion. But this increase was offset by a 2.3% increase in U.S. exports, which rose to $26.6 billion, very close to the record level for exports set in March.

Analysts said the May trade figure is welcome news, proving that sharp drops in the deficit in March and April were not flukes.

Administration Happy

The figures were also good news for the Reagan Administration, which is counting on strong export growth to propel the economy in this presidential election year.

For the first five months of the year, the U.S. trade deficit, after adjusting for normal seasonal variations, has been running at an annual rate of $140.7 billion, down substantially from the record deficit of $170.3 billion run up last year.

The improvement has come from a boom in export sales, which for the first five months of this year are running a remarkable 30.4% above the same period in 1987. Imports were also up by 11.4% during the same period, reflecting in part price increases caused by the decline in the value of the dollar over the last three years.

The Administration in 1985 embarked on a coordinated strategy with other major industrial countries of devaluing the dollar as a way of curing the country’s trade problems.

Strategy Took Longer

A weak dollar makes American goods cheaper and thus more competitive on overseas markets while making imports more expensive for American consumers.

The strategy took much longer than expected to show benefits, but the Administration is confident that the trade imbalance for 1988 will decline, marking the first annual improvement in eight years.

The increase in exports in May reflected a $300 million rise in agricultural shipments, a $300 million advance in sales of capital goods and a $100 million rise in sales of American autos and parts overseas.

The rise in imports reflected increases of $1.1 billion in industrial supplies and smaller rises in imports of capital goods. Imports of autos fell by $600 million during the month.

Oil Imports Rose

Oil imports rose 17.7% during the month to $3.9 billion.

By country, the biggest deficit, as usual, was with Japan, an imbalance of $4.1 billion, down slightly from the April imbalance of $4.4 billion.

The substantial trade improvement has been a key factor in the better-than-expected economic growth the country has enjoyed so far this year. U.S. manufacturing has been enjoying boom times because of a surge in export sales.

Many economists believe almost half of the economy’s growth this year will come from an improving trade performance.