Inflation in Wholesale Prices Dips; Hopes Rise for Cut in Interest Rates

Wholesale prices declined 0.2% in July, the Labor Department said Friday, indicating to analysts that inflation remains under control and that the Federal Reserve has room to lower interest rates further to encourage economic recovery.

The drop was welcomed by both the White House and private sector economists, who had predicted that producer prices would remain unchanged in July. The decline follows a 0.3% decrease in June and a 0.6% increase in May, the Labor Department said.

Much of the overall decline was attributed to a sharp drop in gasoline and food prices--traditionally among the most volatile components of the producer price index. Excluding price drops in those areas, the “core rate” rose 0.2%, still lower than predicted by financial analysts.

In Kennebunkport, Me., where President Bush is vacationing, White House Press Secretary Marlin Fitzwater called the report “very encouraging.”

“We’ve had two straight months now of a decline in the producer price index, which is certainly good news on the inflation front,” he said. “It appears to be low and under control. And that does give room for some impetus to continued growth and for recovery from the recession.”

He noted that the Federal Reserve Board “has just lowered interest rates, and we think that’s a very encouraging sign.”

But asked specifically whether the Administration would like to see the Fed lower interest rates further, Fitzwater stuck to long-held White House policy, replying, “We don’t try to tell the Fed what to do.”

Although in recent months financial analysts have criticized Administration optimism about the economy, they agreed Friday that the price report sends an upbeat signal.

“This report is quite good news for the Federal Reserve, for financial markets and for the consumer,” said Lynn Reaser, an economist with First Interstate Bancorp in Los Angeles. “It indicates that the Fed was correct in easing monetary policy, and it also sets the stage for further easing, should that be required.”

The stability in wholesale prices soon should begin trickling down to the retail level, Reaser added.

Lower prices already have been passed along to consumers at the gas pump and at the supermarket.

Gasoline prices fell 5.5% from June, compared to May’s 1.6% decrease. Wholesale prices on a host of food products also dropped sharply, making some vegetables 25% cheaper than they were in June.

Times staff writer James Gerstenzang in Kennebunkport, Me., contributed to this report.