Wholesale Prices Off 0.1%, First Hopeful Drop in 18 Months

In an unexpected sign that this year’s inflation surge might be easing, wholesale prices fell 0.1% in June, the first drop in 18 months, the government said today.

The slight decline in the Labor Department’s Producer Price Index, driven down by steep declines in energy and food prices, surprised most economists, who were expecting a moderate increase of 0.3%, and marked a sharp turnaround from the big 0.9% jump in May.

In another report, the Commerce Department said retail sales fell 0.4% in June--their first monthly back-to-back drop in nearly two years--as consumer spending remained sluggish, particularly for cars and other more costly durable goods.

Industrial Production Drops

And the Federal Reserve reported the operating rate for U.S. factories fell in June to 83.5%, while industrial production dropped 0.2%, further easing concerns about inflation but providing more evidence of a slowing economy.

Energy costs, which had soared more than 20% over the first five months of the year, fell 3.1% in June, the biggest drop in three years.

Food prices fell 0.8%, the steepest in a year and a half, reversing an identical increase in May.

Despite the overall decline, economists were likely to read mixed signals from the June report because goods other than food and energy rose 0.7%, the largest increase since October, 1986.

Because food and energy prices swing widely from month to month and are less influenced by the economy as a whole, analysts look to the inflation rate of other goods as an indicator of underlying inflationary pressures in the economy.

Inflation Rate

Despite the drop in the index last month, wholesale inflation for the first half of 1989 hit a fast 7.6% annual pace, nearly double last year’s 4% rise.

The Labor Department said prices of tomatoes and celery, which had doubled in May, fell sharply in June. Vegetables overall fell 8% last month, after a 26.4% rise in May.

Other food categories posting declines in May were: pasta, 9%; fish, 7.3%; chickens, 5.2%, and beef and veal, 3.8%.

Prices rose for pork, turkey, fresh fruit, eggs and candy.

Energy costs fell across the board with drops of 8% for fuel oil, 4% for gasoline and 2% for natural gas.

The department said the increase in other catagories was driven primarily by a 5.8% jump in cigarettes and other tobacco products and for ships.

Rising Prices

Prices for prescription and over-the-counter drugs, soaps and furniture also rose, while prices for flatware, women’s clothing, jewelry, glassware and cosmetics declined.

The overall June decline left the Producer Price Index for finished goods one stop short of retail at 114.1, meaning that a hypothetical selection of goods costing $100 in 1982 would have cost $114.10 last month, 10 cents less than in May.

Most economists believe that inflation will continue to moderate over the next several months, but they are divided over the long-term outlook.

Analysts point out that much of the price spurt earlier this year was fueled by a run-up in crude oil prices in the spring. Now that oil has stabilized at the $20-a-barrel level, energy prices should not be contributing to inflation for a while, they believe.