Wholesale Prices Drop 0.4%; Report Signals No Inflationary Spiral

Wholesale prices fell for the third consecutive month in August as a big drop in energy costs pushed inflation down by 0.4%, the government said today.

The decline in the Labor Department’s producer price index followed a 0.4% plunge in July and a 0.1% dip in June. It was the first time wholesale prices have fallen for three consecutive months since early 1986.

The August price moderation was even better than had been expected and provided further evidence to support arguments that inflation should be well under control in the second half of the year.

The three-month string of declines in wholesale prices was particularly welcome because it came after a surge in prices earlier this year had triggered fears of a possible inflationary spiral.

Moderate Inflation

Wholesale prices were surging ahead at an annual rate of 9.4% through May. With the monthly declines since that time, however, wholesale inflation is running at a much more moderate annual rate of 4.4% through the first eight months of the year. In 1988, wholesale prices rose 4%.

A broad-based drop in energy costs was credited for the price decline in August.

Gasoline prices plunged 12.1%, the third consecutive monthly decline. Prices of natural gas were also down, dropping 5%, and prices of home heating oil fell 2.1%.

Food costs were not as well controlled, posting a 0.3% increase as the costs of beef, dairy products and bakery goods accelerated. Prices of eggs and pork rose in August after having fallen in July.

Inflation, excluding the food and energy categories, was up 0.5%, reflecting in part higher prices for new cars. Many economists look to price increases of other goods as a better indicator of the underlying inflation rate because food and energy costs are more volatile from month to month.

Economists had worried that higher food and energy costs were threatening to become embedded in permanently higher inflation rates as workers demanded higher wage increases to make up for the ground lost to rising prices.