Wholesale Prices Dip Slightly in July; Outlook Still Bleak

Wholesale prices edged down slightly in July, the government reported Friday, but analysts said the respite was bound to be short-lived as the economy braces for the impact of the past week’s sharp rise in oil prices in response to the turmoil in the Middle East.

The Labor Department’s monthly report showed that prices charged by producers dipped by 1/10th of a percentage point last month, following increases of 0.2% in June and 0.3% in May--a welcome-enough trend by any measure. Energy costs plunged 0.5% during July.

But economists were quick to point out that the July performance is likely to be reversed by the recent oil price increases, the effects of which are expected to spread throughout the entire economy.

“We didn’t have any inflation before Iraq decided to create some,” said Donald Ratajczak, director of the economic forecasting center at Georgia State University in Atlanta. But now, he added, “clearly we have an oil shock coming.”

Lynn Reaser, senior economist at First Interstate Bancorp in Los Angeles, agreed. “The overall thrust of the report is that inflation remains under control,” she said, mainly because of the Federal Reserve’s continuing tight money and credit policies.

But after the past week’s oil price hikes, she said, the overall producer price index rise in August “should be quite alarming”--possibly as high as 1.7%. Energy costs account for about 9% of the overall index.

Last month, crude oil traded for $18 per barrel, but prices last week jumped to over $28 per barrel before easing to $25 or $26 per barrel.

As a result, Reaser said, the price surge should show up at the retail level relatively quickly, but it also could be more muted, with consumer prices posting a rise of just under 1% for the month.

Despite Friday’s gloomy outlook, analysts said, if oil supplies continue to flow without interruption, the current oil price levels should not lead to sustained inflation.

“If the crisis is resolved, oil prices are likely to retreat, and we should see this as a blip in the inflation rate,” Reaser said.

“I don’t think this incident will lead to double-digit inflation like the oil shocks of the 1970s,” agreed Joel A. Popkin, an independent economist based in Washington. He added that he expects the rate of inflation without food or energy costs to remain steady at 5%.

The government reported that wholesale food prices were unchanged in July, following a small decrease in the previous month. Ratajczak said food prices should continue to decline despite the oil price hikes.

“There is no question that the cost of producing food will go up,” he explained. But despite farmers’ desires for higher prices, increased production in food markets worldwide should help keep prices down. The result, he said, “is that farmers will be squeezed.”

Analysts differed over longer-term forecasts for the economy.

The oil price increases “certainly heighten the risk of a recession,” said Sara Johnson, an analyst at DRI/McGraw-Hill in Boston, because consumers’ spending power has been diminished.

But although GNP growth will be nominal, Johnson said, her firm is not predicting a recession at this time. “After the initial oil shock is absorbed,” she added, inflation should stabilize at about 4.5%.

Ratajczak noted that prices in the industrial sector are experiencing “a little bit of a flare-up.” That, he said, is inconsistent with expectations of how the sector behaves in a recession. “July was not a recession month,” he said.

All the same, he said, because of other factors, including a decline in payroll employment, he predicted that a few months from now “people will probably say that the recession began in July.”

Popkin noted that prices of intermediate goods are usually the first to weaken and indicate the onset of recession. The government report indicated that prices for intermediate goods dropped in May and June and only held steady in July.

“I think this does indicate that the run-up of the spring has ended,” Popkin said.