Wholesale Prices Rise 1%, Sending Markets Reeling

Higher food and energy costs sent wholesale prices up 1% in February, matching January’s increase and bringing wholesale inflation this year to 12.6% were the trend to continue through December, the Labor Department said Friday.

The news sent stock and bond prices tumbling and renewed fears that the economy may be heading into a period of rapid inflation, combined with slowing economic growth.

“You can expect more inflation while the economy is slowing,” said Hugh Johnson, chief investment analyst for the First Albany Corp. “No one knows how long that lasts. . . . But the facts support the notion that you could have stagflation.”

Asked whether he was concerned about the leap in inflation at the wholesale level, President Bush said the nation must “always be vigilant against inflation, never relax our concern.” The price increase, Bush added, “should not be overlooked. It was another clarion call to do something.” Continued sharp increases in food and energy prices pushed the index up 1% to 111.7 for finished goods in February, much more than the 0.4% increase analysts had expected. That compares to an average monthly increase of only 0.3% during 1988, the department’s Bureau of Labor Statistics said.

Excluding the volatile food and energy prices, prices for finished goods were 0.6% higher than the month before.

Since last February, wholesale prices have increased 5.3%, the bureau said, compared to a 4.4% increase for all of 1988.

Economists and traders had been looking forward all week to the producer price index report for clues to whether Federal Reserve Board action to tighten credit had been effective in curbing inflation.

The news frightened the markets, which had only a subdued response to other more positive news on the inflation front last week.

“The mood changed immediately from guarded optimism to real pessimism,” Johnson said.

Prices were sharply lower at the close of the New York Stock Exchange. The Dow Jones industrial average, which rose 20.17 Thursday, plunged 48.57 points to 2,292.14, the sharpest drop for the blue-chip index since April 14, 1988, when it plummeted 101.46 points.

The dollar surged in early New York trading on the news, but the increase in prices could renew stock market fears about inflation and higher interest rates and was expected to dampen recent market optimism.

Dirk van Dongen, president of the National Assn. of Wholesaler-Distributors, said the two worst forces sending wholesale prices upward were a shortage of labor and the beginnings of an inflationary psychology rooting itself in society.

“If people start to believe we’re going to have a consistent level of high inflation, they behave in accordance with that perception . . . and the whole damned thing starts feeding on itself,” Van Dongen said. “It’s very hard to change that when it’s taken root in people’s minds.”

Food prices showed especially sharp increases, with the costs for fresh and dried vegetables jumping 35.3%. Beef, apples, coffee, soft drinks, fish, pasta and turkeys all cost more than in January, but the prices of eggs, dairy products, cooking oils and rice dropped.

Natural gas prices increased 1.9% and gasoline at the pump was 4.1% higher than the month before, the bureau said. Those increases were partially offset by lower fuel oil prices.

The sharpest increases were in the finished goods sector while the index for finished goods rose 0.5% in February after a 0.9% increase in January.

A glimmer of hope for the future came in the index for raw materials, which was down 0.1% after rising a sharp 3.9% in January, the bureau said. That decrease may work its way into consumer pocketbooks several months down the road.

In three reports released Thursday, the government said that housing starts fell 11.4% in February, capacity utilization eased to 84.3% and industrial production remained flat from the previous month.