Wholesale Prices Rise 0.2%; Inflation May Be in Check

Wholesale prices edged up 0.2% in June, the Labor Department said Friday in a report cited by economists as further proof that inflation for most goods is slowing sharply.

The producer price index has increased only 3.1% over the last year and has advanced at a 3.7% annual rate during the first half of 1990. But the index of wholesale price changes has remained unchanged since January, when bad weather sent food and energy prices soaring.

The signs of price moderation appeared to vindicate Federal Reserve Chairman Alan Greenspan’s unusually forthright suggestion Thursday that the Fed would ease interest rates to offset signs of a credit crunch at the nation’s commercial banks.

Indeed, the Federal Reserve began pumping funds into the financial system Friday, causing the federal funds interest rate on overnight loans among banks to fall to 8% from 8.25%. The federal funds rate is considered a key indicator of Fed monetary policy.

“Greenspan promises and the Fed delivers,” said Samuel Kahan, chief economist for Fuji Securities in Chicago.

Greenspan’s remarks also apparently fueled this week’s stock market rally, and Friday’s inflation report provided additional momentum, propelling the Dow Jones industrial index over the 3,000 mark for the first time. The average closed at a record 2,980.20.

Although the overall rate of wholesale inflation was moderate, transient increases in auto prices and a continued upward march in tobacco prices made the so-called core rate of inflation--excluding food and energy--move upward by an apparently unsettling 0.6% in June.

But the auto price increases are likely to reverse in coming months and, as one economist put it, “the Fed isn’t about to tighten because tobacco prices are going up.”

Much of last month’s price moderation reflected a continuing correction from January’s weather-related price hikes.

Food prices, which dipped 0.4% in June, have fallen in three of the last five months after a 2.4% increase in January. Energy prices, which fell 0.9% last month, have fallen every month since a dramatic 13.7% surge in January.

“This looks pretty good to me,” said Stacy Kottman of the Economic Forecasting Project at Georgia State University. “You’d be hard-pressed to find much accelerating inflation here.”

Kottman, a specialist in price movements, noted that auto prices, which surged 2.3% in June, are more likely to decline than to keep rising in the next few months.

“Car prices are up only 2.5% over the past year, and in today’s competitive auto market, there’s no reason to assume we’re going to be getting high inflation in auto prices,” he said. “In fact, we’re more likely to start seeing discounting.”

Tobacco prices, on the other hand, are continuing to rise at both the wholesale and retail levels. Wholesale tobacco prices increased 3.2% in June and are now 13.9% higher than a year ago. The possible inclusion of a tobacco tax increase in a federal deficit-reduction package could push prices still higher.

Of all the items in the government’s index of wholesale prices, however, tobacco may have less real impact on the economy than any other. “Tobacco pricing is a matter of industry and government policy and has nothing to do with demand,” Kottman said.

Allen Sinai, chief economist with Boston Co., said the absence of significant commodity price inflation is welcome news, but he cautioned that it reflects “a very weak goods economy that has been flirting with recession for a year now.”

PRODUCER PRICE INDEX For finished goods. Seasonally adjusted change from prior month June, ‘90: +0.2% May, ‘90: +0.3% June, ‘89: +0.1% Source: Labor Department