THE ECONOMY : Wholesale Price Index Decline Masks Inflation of 6%

Wholesale prices fell for the third consecutive month in August, the government reported Friday, but economists noted that plummeting energy prices masked a continuation of moderate inflation for most wholesale goods.

The Labor Department said its producer price index dipped 0.4% last month, following an identical drop in July and a 0.1% decline in June. The index of wholesale prices is considered a good indication of where consumer prices are headed.

The August decline was attributable in large part to a 7.3% plunge in energy prices, which have fallen for several months after a sharp run-up in the spring. Food prices, another volatile component of the index, increased 0.3% in August.

Excluding energy and food, producer prices rose 0.5%, indicating that the “core” rate of wholesale inflation is running at an annual rate of more than 6%. For that reason, economists were somewhat less than ecstatic about the August figures.

‘Inflationary Psychology’

“This looks better on the surface than in detail, because inflation at more than 6% is no bargain,” said Donald Straszheim, an economist with Merrill Lynch in New York. “The key here was the decline in gasoline, but energy prices have now turned around again. We could get a hike in gasoline next month.”

Other analysts echoed Straszheim’s concerns.

“With core inflation at a 6% rate, we’re getting close to the point where consumers and producers alike begin to fall into an inflationary psychology, where a fair amount of inflation is expected,” said Dirk Van Dongen, president of the National Assn. of Wholesaler-Distributors in Washington. “We’ve had core increases for three of the past five months, so we can’t simply declare victory and hang it up on inflation.”

Donald Ratajczak, director of the economic forecasting project at Georgia State University in Atlanta, said, “This was probably the last PPI drop for a while. And energy has probably done its last hurrah for now.”

Ratajczak noted that of about three dozen categories of finished goods, excluding food products, only five declined in August. Of those, three were energy products: gasoline, natural gas and fuel oil. The other two were household glassware and costume jewelry, hardly major factors in the nation’s economy.

Weakness Feared

Since energy prices are expected to rebound in the months ahead and other wholesale products are unlikely to decline significantly, Ratajczak said he expects wholesale prices to increase in September, with consumer prices soon to follow.

Even so, analysts said the likely uptick in prices will not signal another inflation scare such as the one earlier this year because the economy is growing too slowly.

Indeed, Irwin L. Kellner, chief economist at Manufacturers Hanover in New York, said that he is concerned that the economy is weaker than many analysts think.

“We’ve seen the PPI down three months in a row and the last time that happened the economy declined,” Kellner said. The previous three-month decline was January through April of 1986. The economy subsequently declined at an annual rate of 1.8% in the second quarter of that year.

Kellner noted that while the volatile ups and downs of energy prices often are discounted, they exert a “ripple effect” throughout the economy. “In fact,” he said, “it was a collapse in energy prices that killed the economy in the Southwest in 1986 and caused that near-recession.”

But few economists, including Kellner, expect an outright recession now. Straszheim reflected the apparent consensus in predicting relatively sluggish economic growth of about 2% and manageable inflation of about 5% for the next year or two.

“There’s no reason for people to celebrate about this report,” Straszheim said. “But no reason to panic, either.”

With August’s figures included, inflation as measured by the producer price index has settled down to a manageable 4.4% annual rate for the year so far.