Few Worry as Wholesale Prices Spurt 0.9%
Wholesale prices jumped 0.9% in May, considerably more than expected, as the cost of gasoline, food and autos increased, the Labor Department reported Friday.
The increase brought wholesale price inflation for the first five months of 1989 up to an annual rate of 9.4%. However, the financial markets and analysts took the news calmly; economists attributed most of the rise to factors whose main impact has already passed.
“This is not at all what it appears to be,” said Irwin L. Kellner, chief economist at Manufacturers Hanover in New York. “It’s an aberration. What you have here is a continued effect of last year’s drought and the oil price run-up earlier this year.”
Analysts said they expect wholesale price increases to subside for the rest of the year.
“We should see annual rates of producer price inflation running more slowly, at an annual rate of about 3.5% to 5%,” said Allen Sinai, chief economist at the Boston Co. Economic Advisers.
May’s price jump featured increases of 1.8% for passenger cars; 3.3% jump for energy goods and 0.8% for food, with fresh vegetables accounting for most of that.
Energy Inflation Peak
Faced with signs of a slowing economy, the Federal Reserve this week let markets push interest rates down about half a percentage point. After Friday’s report, little further easing seems likely for fear it would fuel inflation.
Nevertheless, analysts said energy inflation seems to have peaked for the year and that new consumer rebates by car makers should blunt further auto price increases. Some speculated that many other price increases at the wholesale level may not be passed along to the consumer.
“Consumers continue to be price-conscious, and businesses continue to be cost-conscious in a very competitive environment,” said Dirk Van Dongen, president of the National Assn. of Wholesaler-Distributors.
“So long as we have that kind of behavior in the economy,” he said, “we don’t have any sign of inflationary psychology driving behavior. Consumers don’t rush to buy for fear prices will be higher tomorrow. And our people are buying sharply, negotiating aggressively, because they realize they can’t pass these things on, willy-nilly.”
The Labor Department reported that inflation for intermediate goods excluding food and energy was only 0.2%, while prices for crude goods other than food and energy actually dropped 0.4%. Thus, prices for finished goods of many types are not expected to accelerate much.
“Vegetable prices were unexpectedly high, but we expect agricultural prices to level and possibly even decline later in the year,” said Stacy Kottman, an analyst at Georgia State University in Atlanta. “There was a rebound in the measured prices of autos from April rebates and incentives, but we don’t expect a lot of that to get into (consumer prices) because the auto market is quite soft and the industry is in no position to make those prices stick on the consumer level.”
Kottman noted that the 3.3% jump in energy prices actually marked a slowdown from a 7.2% increase recorded in April. “We think producer prices for energy have finally ratcheted up to where they are compatible with the $20-a-barrel crude oil we have had all winter, so we don’t look for much higher prices there,” he said. “All that suggests that the producer prices ought to be fairly well behaved by the end of the year.”
Sinai said the high wholesale inflation for the beginning of 1989 will “lock us into producer price inflation of about 6.5% for this year.”
“So the message is that price inflation is still entrenched and will respond only very slowly to a slackening economy. From the point of view of the Fed, this is too high for them to ease any more.”
Before seasonal adjustment, the Labor Department’s producer price index rose 1.2 points to 114.2 in May, from a base of 100 in 1982, meaning that a selected cross-section of wholesale finished goods costing $100 in 1982 would now cost $114.20.
