Wholesale Prices, Prime Rate Climb : Biggest Increase in 3 Years Stirs Inflation Fears

In a surge that immediately revived fears of accelerating inflation, wholesale prices jumped 1% in January, their largest monthly increase in more than three years, the Labor Department said Friday.

The increase was twice as much as had been expected by financial markets and, in concert with the 0.5% boost by major banks in their prime lending rates, helped send the Dow Jones industrial average down 36.97 points.

The unexpectedly bad report immediately revived expectations that the Federal Reserve Board, whose Open Market Committee met this week to set monetary policy for the next few months, soon will boost the discount rate above its current level of 6.5%.

Food, Energy Prices

Economists were dismayed by the news, particularly with its implications for inflation, which lately has been in remission. They noted that the steep increase in wholesale prices was magnified by parallel increases in food and energy prices.

In recent months, food and energy prices had been pulling in opposite directions, with one of those volatile segments of the economy rising while the other fell.

Without food and energy, wholesale prices rose 0.4%, about in line with the underlying rate of inflation for finished goods over the last year.

“Both food and energy chose the same month to go up this time,” said David Wyss of Data Resources Inc., in Lexington, Mass. “We had a lot of luck last year, when most of the time one fluctuated up and the other would go down. This time both bumped in the same direction.”

“This is a bad report” said Donald Ratajczak of Georgia State University in Atlanta.

Even discounting the fact that the big January surges of 4.9% for energy goods and 1.1% for foods probably will not be repeated, “what remains is that we haven’t finished off inflation, and contrary to rumors, the Fed hasn’t won yet,” said Ratajczak, a specialist in price movements.

Economists also worried that Friday’s report contained bad news for the future as well as for the present. Noting that the index for raw materials increased 3.9% in January after a 3.4% jump in December, Dirk van Dongen, president of the National Assn. of Wholesaler-Distributors, predicted that those price increases inevitably would translate into further rises at the wholesale level.

“While crude prices don’t necessarily lock-step all the way through to the finished goods level, certainly some parts of them work their way there,” Van Dongen said. “The message is that all these numbers are beginning to look too high.

Inflation Psychology

“My fear is that we reach a point where an inflation psychology takes root in the economy. Wages begin to chase prices,” he added.

“We don’t expect to see another one-percenter like this,” Ratajczak said. “But we could very well get several months at 0.5%.” If so, that would put inflation as measured by the producer price index on a course toward 7% this year, or even higher. In 1988, wholesale inflation was 4%, compared to 2.2% in 1987.

But Ratajczak also pointed out that the big jump in food prices was driven primarily by large increases in pork and dairy prices, largely a backlash from last year’s drought, when hogs and poultry were slaughtered in large numbers, temporarily driving down their prices. The raw materials price index used by the Labor Department is heavily weighted toward food and energy prices.

Picking up on that theme, Wyss of Data Resources suggested that the recent increase in petroleum prices, caused by last November’s short-lived agreement by Middle East oil producers to revive their production cartel, would prove to be more an aberration than a permanent trend.

In response to that agreement, crude petroleum prices jumped 12.8% on the Labor Department crude materials price index in December and another 12.2% last month, but spot prices have already begun to fall again. “In general, these crude oil price moves take about six weeks to show up here,” said Wyss, and another month or more to reach the wholesale price level.

An optimistic note was sounded by Irwin L. Kellner, chief economist at Manufacturers Hanover Trust in New York, and often a dissenter from conventional financial market expectations. “Most of this was energy, and without energy and food, this was pretty good,” he said. “These steep swings in commodity prices aren’t translating into prices at the consumer level. Without food and energy, the consumer price index is holding steady at about 4% a year.”

Before seasonal adjustment, the producer price index rose in January to 111 from a base of 100 in 1982. That is, a basket of finished goods that sold at wholesale for $100 in 1982 would have cost $111 last month.

The federal funds rate, the central bank’s normal vehicle for controlling short-term interest rates, closed the week at 9 3/16%.