Producer Prices Level Off After a 7-Month Climb
Wholesale prices remained unchanged in October after seven consecutive months of inflation, the Labor Department reported Thursday, but economists warned that the nation’s economy still faces a threat of accelerated price increases.
“That zero is actually an average of some ups and some downs,” noted Cynthia Latta, an analyst at Data Resources, a research firm in Lexington, Mass., “and that certainly is good news. But I don’t think we should stop worrying about inflation.”
Wholesale food prices were down for the first time since last winter as the drought’s inflationary impact waned. Offsetting that 0.3% drop was an equivalent hike in energy costs, pushed up by an unusual 4.6% October surge in natural gas prices.
More Inflation Predicted
Without the volatile food and energy components, wholesale prices were down by 0.1% last month, in large part because of a small seasonal swing in new-model car prices. The price index for capital equipment, in which motor vehicles are a major factor, fell 0.3% after two months of substantial increases.
“On balance, you have to view this as good news because it suggests that--in the industrial sector, especially--inflationary pressures aren’t so bad as people thought last summer,” Latta said. “But you shouldn’t assume that the effects of the drought are behind us. Meat prices were lower because herds were slaughtered, and those prices will be much higher later on.”
Analyst Bruce Steinberg of the Merrill Lynch investment firm in New York predicted a quick return of steeper inflation. October’s overall stability “doesn’t get us out of the woods on inflation,” he said.
“I still think the major issue is going to be the future behavior of wage costs, and . . . they are in an accelerating trend,” he added.
Signal From Employment Report
But Robert F. Wescott of Alphametrics, a Philadelphia economic forecasting firm, was more optimistic. “I’ve been saying since last spring that the run-up in commodity prices was like a speculative bubble, so it’s no surprise now to see a quieting down of commodity price inflation,” he said. “This fits in with a pattern of steady growth and moderate inflation, not a surge in inflation.”
Thursday’s good news on prices was counterbalanced to some extent by last week’s report on employment, in which unemployment dropped to a 14-year low of 5.2% and 330,000 new jobs were added to the economy. Economists pointed to that as a sign of a tightening labor market, with higher wage inflation seen as a likely effect.
The Labor Department said prices of partly finished goods, such as milled flour, sheet steel and industrial fuels, also did not increase in October. Inflation in intermediate goods had marched steadily forward every month for the past two years. The price of crude goods, meanwhile, fell 0.1% in October after a 0.5% decline in September.
Before seasonal adjustment, the Labor Department’s index for finished goods rose 0.6% to 109.3, meaning that a hypothetical selection of goods costing $100 at the wholesale level in 1982 would have cost $109.30 last month.
In general, wholesale prices for finished consumer goods other than food and energy have risen 4.1% in the past 12 months, slightly below a 4.5% increase in consumer prices over the same period. Energy prices at the wholesale level have fallen 5.9% over the year while food prices have risen a total of 4.5%. In all, wholesale prices are 2.9% above what they were in October, 1987.
Alphametrics’ Wescott said the halt in wholesale price increases in October could ease pressure on the Federal Reserve to jack up interest rates as a curb against inflation. Market concerns about such action by the Fed were inflamed by the unemployment report, but this development “should give comfort on that score,” Wescott said.
Dirk Van Dongen, president of the National Assn. of Wholesaler-Distributors, added: “We see no evidence of an inflationary psychology.”
