Wholesale Prices Drop 0.3%, Easing Fears That Inflation Is Heating Up : Economy: Retail sales fell 0.6% in April. The two reports suggest that interest rates have peaked.
Large declines in food and energy prices pushed wholesale prices down 0.3% in April, the Labor Department said Friday in a report that appeared to help ease concerns about a possible inflation-fueled rise in interest rates.
At the same time, the Commerce Department reported that retail sales fell 0.6% during April, following a 0.2% decline in March. The slower sales, together with last week’s report of an increase in April unemployment, were seen as signs of a rapidly weakening economy.
The nation’s financial markets interpreted the reports as welcome omens that interest rates have peaked--that the Federal Reserve will not be inclined to push them higher to combat inflationary pressures.
Rates on long- and intermediate-term bonds plummeted, bond prices surged and the Dow Jones industrial index of blue chip stocks soared 63.06 points to close above 2,800 for the first time in months.
Economists agreed that April’s decline in wholesale prices, which fell 0.2% in March, reflected slowing inflation for finished goods and for many intermediate and crude commodities.
But they warned that inflation remains entrenched in the service sector of the economy, which now contributes the lion’s share of economic growth and is not reflected in the producer price index of wholesale price movements.
“It sure helped the markets,” noted economist Michael Penzer of Bank of America in San Francisco. “But the bond market these days is looking for economic weakness, and I don’t think the economy is as weak as the bond market does.”
Penzer and Allen Sinai, chief economist of the Boston Co. investment firm, said inflation in the services sector is a continuing concern.
“The producer price index doesn’t tell us about services--and that’s where the inflation is, and that may also be where most of the consumer buying is,” Sinai said.
Much of the decline in finished goods prices was concentrated in food and energy. Food prices fell 0.6%, continuing a reversal from steep midwinter increases. Energy prices dropped 1.7% in a similar correction from a freak 13.4% increase in January, when weather-related energy inflation sent producer prices soaring 1.8%.
Excluding food and energy, the “core” rate of April inflation for finished goods was 0.2%. Among the major contributors was a 0.9% decline in wholesale prices of passenger cars and a 0.5% decline for trucks, both reflecting weak sales in the auto industry.
“I don’t see recession in this report, but I do see a sluggish consumer, because consumer prices have been rising faster than wages and people aren’t buying,” said Donald Ratajczak, a specialist in price movements at Georgia State University in Atlanta. “There seems to be no question of the Fed tightening now.”
Prices for intermediate goods, which represent an earlier stage in the production chain, were up a scant 0.1% in April. The small increase, which reflects a winter decline in energy prices, suggests that inflation will continue to be moderate at the wholesale level in coming months.
Prices of raw materials were pushed down a steep 3.1%, reflecting a 7.8% drop in energy products, primarily crude petroleum. But a midwinter drop in prices of scrap metal, copper and other crude industrial materials, which had raised recession fears a few months ago, was reversed in April.
Those basic metals, noted Ratajczak, showed some “big-time” increases: aluminum scrap rose 7.3%, iron scrap 6.4% and copper scrap 5.1%.
Before seasonal adjustment, the producer price index stood unchanged at 117, compared to a 1982 base of 100. That means a cross-section of finished goods that cost $100 eight years ago would have cost $117 last month.
MARKET REACTS: Economic news sends the Dow skyrocketing. A1