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0.4% Wholesale Price Rise Stills Inflation Fears

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Times Staff Writer

Wholesale prices advanced a modest 0.4% in March, the Labor Department said Friday, calming inflation fears and buoying financial markets after two consecutive months of unexpectedly large increases.

The gain in the producer price index for finished goods followed increases of 1% in both January and February. The combined rise for the first quarter represents an annual wholesale inflation rate of 10.1%, well above the 4.2% rate for the same period in 1988.

Economists welcomed the March figures as a respite from the big increases of January and February, which had fueled fears that inflation was spiraling out of control.

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The report was greeted with enthusiasm on the financial markets, where interest rates slackened and stock prices soared. The Dow Jones Industrial Average gained 41.06 points Friday to close at 2337.06. That was the Dow’s best daily gain since last Oct. 20. (Details in Business, Page 1.)

Trade Deficit Rises

The federal government announced also Friday that the nation’s merchandise trade deficit rose to $10.5 billion in February from a revised $8.7 billion in January, but that report appeared to have little effect on the financial markets.

Combined with reports of softening retail sales and declining industrial production, the producer price figures indicate that the economy is slowing just enough to make inflation appear more manageable, said Roger Brinner of Data Resources Inc. in Lexington, Mass.

“Inflation is still here as a problem,” Brinner said, “but not a hysterical problem.”

The March rise in the wholesale index was paced by food and energy prices, which rose 0.8% and 0.9% respectively. The increase for all other finished goods was a much more moderate 0.3%.

Finished energy goods, including gasoline, advanced at a whopping 38.3% annual rate during the first quarter, compared to a 7% rate of decline last year.

Brinner noted that producer price inflation has been running at an annual rate of 5.6% over the last 12 months, or 4.5% excluding volatile food and energy costs. “Both those rates are in the Federal Reserve’s discomfort zone,” he said.

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The Federal Reserve Board has increased interest rates in recent months in an effort to slow the economy and reduce inflationary pressures. Some economists have feared that the Fed’s anti-inflation campaign could push the country into a recession.

Despite the generally favorable response to the March figures, the wholesale inflation record so far this year has been dismal, with double-digit annual rates at virtually every stage of the production chain.

Prices of raw materials, for example, jumped 2.3% in March. During the first three months of 1989, prices of crude goods have advanced at an annual rate of 27%, driven by an even more frightening 45.1% annual increase for crude energy prices.

During the first quarter of 1988, raw material prices were essentially flat, and crude energy prices fell at an annual rate of 24.1%

“These crude numbers concern us terribly,” said Dirk Van Dongen, president of the National Assn. of Wholesaler-Distributors. “These inevitably work their way into the system. Sooner or later, that water boiling at the bottom of the pot gets to the top.”

Irwin L. Kellner, chief economist at Manufacturers Hanover Bank in New York, noted that about four-fifths of all reporting industries registered price increases for finished goods at less than the 0.4% rate for all wholesale goods.

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Higher Fuel Costs Seen

Although March’s moderate figures brought “a sigh of relief” after the big gains in January and February, Kellner warned that energy prices would rise even higher in April’s wholesale price index. Petroleum prices have increased sharply in recent weeks in response to the Alaska oil spill and generally tight supplies.

The Labor Department’s producer price index rose 0.5 of a point to 112.2 in March from a base of 100 in 1982. That means a cross section of finished goods costing $100 in 1982 would have cost $112.20 last month.

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