Producer Index Dives as Food, Fuel Costs Drop

A steep drop in food and energy costs sent wholesale prices plummeting during December, partly reflecting the impact of the recession, the government reported Friday. The decline marked the first relief on the price front since Iraq invaded Kuwait in August.

The Labor Department’s producer price index fell a sharp 0.6% over the month, following increases of 0.5% or more for most of the summer and autumn. In November, the index rose by 0.5%, largely because of then-increasing energy prices.

Although the price relief was welcome, analysts said the benefits

may soon be offset--particularly if the United States becomes embroiled in a war in the Persian Gulf later this month, as is becoming increasingly possible.

With the December figures included, inflation at the wholesale level was 5.6% for all of 1990, the steepest rise in the index since 1981, when producer prices leaped 7.1%. The increase in 1989 was 4.9%.

However, to the surprise of many economists, the increase during the last few months was largely confined to the energy sector--where prices rose 29.8% over the year--and did not spread to the rest of the economy, as happened during the oil price hikes of the 1970s.

For the year, gasoline prices rose 45.2% at the wholesale level, home heating oil rose 28.1% and natural gas rose 3.7%.

Friday’s figures showed that the so-called underlying “core” rate of inflation at the wholesale level, which excludes the volatile food and energy prices, rose only 0.3% for December and a relatively moderate 3.5% for the year--not enough to worsen the recession materially.

“This is primarily energy, not deflation,” said Donald Straszheim, economist for Merrill Lynch Capital Markets. “Of course, there are prices in some industries that are falling. . . . But is this 1930, and are we at the start of a five-year deflationary spiral? I don’t think so.”

Allen Sinai, economist for The Boston Company, agreed. “I don’t think deflation is the order of the day, but a much more moderate inflation,” Sinai said. “This is a signal . . . that the worst of the inflation is past, unless there is another oil price spike.”

The new, more optimistic figures sent financial markets on the upswing early in the day, but eventually they were overwhelmed by investors’ concern over developments in the Persian Gulf crisis. The Dow Jones industrial average closed up 2.73 points at 2,501.49.

Friday’s report showed that energy prices at the wholesale level fell 4.8% during the month, following increases of 14.1% in September, 8% in October and 0.1% in November. Producer prices for food fell 0.9% in December. In October and November, they rose 0.9% and 0.8%, respectively.

Wholesale prices of many consumer goods showed some declines as well. Producer prices of women’s apparel, for example, fell 1.1% in December. Prices of household goods dropped 0.1%, and those for children’s toys dipped 0.2%.

Donald Ratajczak, an economist at Georgia State University in Atlanta, said the bulk of those price declines were the result of a slump in some manufacturing industries.

Still, there were some unsettling price movements. Wholesale prices of capital goods, which are important to U.S. exporters, rose 0.4% in December. Prices of autos and light trucks were up 0.9%, textile machinery was up 0.8% and pumps and compressors were up 0.7%.

Prices of goods at the intermediate stages of processing fell 0.9%, while those for crude materials declined 5.4%, following a drop of 6.2% in November. Prices of crude materials now have posted sizable declines for three consecutive months.

The December decline brought the overall producer price index to a level 121.9% of its 1982 average. That means it took $121.90 to buy the same goods at wholesale in December that cost $100 eight years before.

WHOLESALE COSTS ON THE RISE

The following are month-by-month producer price increases and decreases, by percentage, for 1990.

1990 All Food Energy Underlying Month Prices Prices Prices “Core” Rate January 1.9% 2.3% 13.7% 0.2% February 0.0 0.7 -4.5 0.3 March -0.2 -0.5 -2.7 0.4 April -0.2 -0.9 -0.7 0.1 May 0.1 0.3 -1.5 0.3 June 0.2 -0.4 -1.6 0.6 July 0.1 0.3 0.0 0.0 August 1.1 0.6 8.7 0.2 September 1.6 -0.8 14.1 0.6 October 1.1 0.9 8.0 0.0 November 0.5 0.8 0.1 0.5 December -0.6 -0.9 -4.8 0.3

Source: U.S. Bureau of Labor Statistics