Stocks Surge as Wholesale Prices Post Only 0.4% Gain
Wholesale prices, which rose at double-digit rates last winter and fueled a severe inflation scare, shrugged off a huge 7.2% monthly surge in energy costs in April and advanced only 0.4%, well below market expectations, the Labor Department reported Friday.
The news sparked a huge rally on Wall Street, where the Dow Jones industrial average surged 56.82 points.
“This was a terrific inflation report. You couldn’t ask for anything better,” said Bruce Steinberg of Merrill Lynch in New York. “The problem is whether it is too good to be true.”
Steinberg said the rate was artificially pushed down by unsustainable wholesale price concessions by auto manufacturers seeking to work off excess unsold inventory, and he predicted that next week’s Labor Department report on consumer prices would show inflation hovering at the 5%-plus rate that has bothered markets all year.
The April report showed that food prices, which also had been rising sharply earlier in the year, declined 0.6% last month as the negative impact of last year’s drought finally passed through the pricing chain. More important, the prices of all finished goods except food and energy declined by 0.1% for the first drop since October, 1987, in what many analysts believe is the core measure of goods inflation.
Most economists and financial market specialists had expected the producer price index to show another big increase last month, and consensus expectations ranged between a low of 0.7% and the more frightening jumps of a full percentage point recorded in January and February.
The April figures “may have been a fluke but it still may be a first sign (that) we are coming out of the woods on inflation,” said Donald Ratajczak of the economic forecasting project at Georgia State University, Atlanta.
Ratajczak, a specialist in price movements, noted that passenger car prices had dropped 2.8% “because the manufacturers really wanted to move inventory.
“That’s only temporary and will bounce back up in May,” he said. “But even without the cars, the increase without food and energy would only have been 0.2%. That’s not a bad number.”
Ratajczak explained that the latest price report, together with a slower than expected retail sales record in April and last week’s equally unexpected report of higher unemployment and sluggish job growth last month, points unmistakably to an economy in which slackening demand is taking the form of buyers’ resistance to some posted price increases.
The producer price index, reported Friday, and the consumer price index, to be reported next week, are based on posted prices, not the prices people actually pay, Ratajczak noted. “We’re beginning to see some signs that the economic slowdown is lowering prices across the board for industrial materials and capital goods,” he said.
“Usually what happens is that the economy slows first and inflation hangs on for a while. But this seems to suggest that prices may start down this time without a lag, so we won’t have to take such a deep cut in the economy and we may get away with a soft landing after all.”
The Federal Reserve Board, which has been ratcheting up interest rates for more than a year in an effort to ease inflation and restrain growth to avoid a “hard-landing” recession later on, is due to convene its policy-setting Open Market Committee next week.
Friday’s wholesale price report, most analysts predicted, virtually eliminates the likelihood of more Fed tightening in the near term. But the danger of recession still remains, other analysts warned.
“The evidence right now on the real economy is that it is slowing down fast and these numbers suggest (that) April may be even weaker than we thought,” noted Merrill Lynch’s Steinberg. “This probably eliminates the likelihood that the Fed will tighten again and they (the Fed’s governors) could even begin to ease up after a while. In fact, the danger now is that the Fed has already overshot and we are already on the way to a recession.”
“This was a welcome inflation report because it suggests that the price upsurge may be breaking,” added Allen Sinai of The Boston Co. Economic Advisers. “But inevitably there’s a recession theme in these results. There were signs of deflation in some commodities, and weakness in prices of capital goods and consumer durables, which fits in with weakness in demand. All that spells lower sales, lower revenues and lower profits.”
Sinai cautioned further that the big jump in gasoline and other energy prices, while abnormal, still has to be absorbed to some extent by retailers and, later on, by consumers, and therefore will add to the upward pressure on wage demands already exerted by the higher rates of goods inflation recorded earlier this year.
Before seasonal adjustment, the April increase for wholesale prices left the producer price index for finished goods at 113.0, meaning that a hypothetical cross section of goods costing $100 in 1982 would have cost $113 last month, up from $112.20 in March.
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