Producer Costs Rise at 5.7% Annual Rate
Supporting the Federal Reserve’s growing fears of inflation, the Labor Department reported Friday that wholesale prices last month continued to rise at a pace well above that of recent years.
The solid 0.5% July jump in the producer price index, adjusted for seasonal variations, meant inflation at the wholesale level was running at a 5.7% annual rate.
Wholesale prices were up 0.4% in June and, so far this year, wholesale inflation has reached a 4.1% annual rate, nearly double the 2.2% increase in prices for all of 1987.
Moreover, wholesale prices--excluding the volatile food and energy sectors--rose 0.6% in July, up sharply from the 0.3% gains in both May and June. Many analysts consider price changes for products other than food and energy to be the best indicator of underlying inflation.
Meanwhile, another government report also raised fears of potential overheating of the economy.
Business sales advanced 1.4%, the Commerce Department reported, while inventories went up 0.7%. Generally, when sales are advancing at a faster pace than inventories, manufacturers are encouraged to boost production.
Some analysts are worried that inflation will accelerate because a variety of American industries are having trouble meeting strong demand for goods from both home and abroad. For that reason, they support the Federal Reserve’s decision earlier this week to boost interest rates in an effort to slow consumer demand in the United States.
“The U.S. economy is robust, and that means some bottlenecks and capacity problems and some inflation in certain products,” said Dirk Van Dongen, head of the National Assn. of Wholesaler-Distributors. “Policy-makers should continue to chart a course resulting in price stability. In that regard, we commend the Fed for its interest rate actions this week.”
Overreaction by Fed Seen
But a few economists are convinced that the central bank has already gone too far in squeezing its hold on credit. “The Fed has overreacted to inflation pressures by raising interest rates,” said Richard Rahn, chief economist at the U.S. Chamber of Commerce. “This act will only threaten economic growth.”
In financial markets, bond prices fell in response to renewed inflation fears that were fanned by the wholesale price outlook and the Agriculture Department’s report Thursday on the prospects for a diminished grain harvest. Bonds carrying a fixed interest rate diminish in value when investors fear higher inflation because they have to compete with new issues offered at higher rates.
The wholesale inflation rate rose despite lower beef and pork prices, which fell because drought-plagued farmers stepped up their slaughtering of cattle and pigs in reaction to dried-out pastures and higher feed prices.
Bakery Prices Up
Wholesale prices in July fell 2.5% for beef, 10.5% for pork and 0.2% for soft drinks. At the same time, prices rose 2.3% for fruit, 7.5% for vegetables, 2% for chicken and 13.3% for bakery products.
Overall, wholesale prices for consumer foods rose at a slower pace in July than in recent months, up just 0.4%, compared with a 1.1% increase in June and a 0.9% hike in May. Economists contend that wholesalers initially overreacted to the drought by boosting prices, and they predicted that food price rises will be more moderate for the next few months.
But they expect meat prices to rise sharply in 1989 because the premature slaughtering will reduce the size of herds. And they predicted a fruit price spiral later this year because the unusually hot weather, while producing a temporary excess supply, will lead to smaller harvests in the months ahead.
Auto Prices Jump
Price increases at the wholesale level were spread across a wide variety of consumer goods. Men’s clothing rose 0.9%. Auto prices jumped 0.5% as manufacturers removed factory incentives that had caused a 1% decrease in June. Cosmetics increased by 1.7% and prescription drugs by 1.1%.
The July increase in finished goods prices, the fifth consecutive monthly rise after a long period of ups and downs, left the Labor Department’s producer price index at 108.5, which means that a variety of goods costing $100 at the wholesale level in 1982 cost $108.50 last month. The same goods would have cost $107.90 in June and $106 one year earlier.
Wholesale price changes for finished goods generally lead changes at the retail level by about one to three months.
And further wholesale price increases appear to be in the pipeline because prices for intermediate goods--those used in processing before goods are ready for sale--rose 0.7% after a 0.9% increase in June. Mostly as a result of sharply lower crude oil costs, however, raw material prices fell 1.1% after three monthly increases in a row in excess of 1%.
