Wholesale Prices Post First Annual Decline Since 1986

Wholesale prices declined in 1991 for the first annual decrease in five years, the government reported Thursday, providing fresh evidence that inflation remains in check and prompting new calls for the Federal Reserve to cut interest rates further.

Last year’s 0.1% decline in the producer price index--a measure of prices charged by factories, farms and others--is largely because of a post-Persian Gulf War drop in oil prices, the Labor Department said.

Even after excluding volatile energy and food fluctuations, wholesale inflation was a moderate 3.1% in 1991.

A separate Labor Department report showed that new claims for unemployment insurance jumped by 22,000 during Christmas week. The increased claims--pushing the seasonally adjusted figure to 458,000 during the week ended Dec. 28--suggest prolonged economic problems for many households.

The combination of reduced inflation and prolonged joblessness emboldened some economists testifying Thursday before Congress’ Joint Economic Committee to urge the Federal Reserve to lower interest rates again to boost the economy.

James Tobin, a Nobel prize-winning economist from Yale University and a member of the advisory committee, said that, even though the Fed recently lowered interest rates, “they still have unused ammunition.”

Last month, the Fed dropped the discount rate to 3.5% in an effort to stimulate growth. Tobin urged the Fed to “take at least another full point off the discount rate and the federal funds rate this month.”

“By waiting too long to take decisive measures, (Fed) Chairman (Alan) Greenspan and his colleagues let the economy flounder and let confidence in a turnaround slip away,” Tobin told the committee.

Paul A. Samuelson, another Nobel Prize-winning economist from the Massachusetts Institute of Technology, also advocated an easier monetary policy to deal with a weak economy, calling for a half-point to a full point cut in interest rates.

The Labor Department noted that the 1991 producer price reduction represents a sharp improvement over 1990’s 5.7% increase and was the first decline since the index dropped 2.3% in 1986.

That performance must be tempered by the fact that energy prices soared nearly 30% as the world braced for the Persian Gulf War in late 1990. Prices fell almost 10% in early 1991 after the speedy conclusion of the crisis.

Absent the wild swings in energy prices, producer prices rose 3.1% for all of 1991, compared to a larger 3.5% jump in 1990. Among the various categories making up the index, passenger car prices fell 0.8% and tobacco prices increased 0.8%.

But food prices declined 0.4% in December and energy prices slid 1.4%, which was more than anticipated.

Marco Babic, senior financial economist at Evans Economics in Washington, said that is good news because food and energy costs account for the bulk of most U.S. household expenditures.

“We certainly do have inflation under control,” he said. “We’re still in a recession. But it’s encouraging for people who are struggling along not to have to worry about their food and fuel prices increasing down the road.”

Babic also expressed concern about the lack of Administration encouragement to spur the economy.

“What we need to do now is have the Administration come up with a fiscal plan that will be non-inflationary,” he said. “We have to take the benefit of this decreased producer price and mold that with a fiscal plan. Then we would be in the best of both worlds.”

Lawrence A. Kudlow, chief economist of Bear, Stearns & Co. and a member of the joint economic panel, also cheered the drop in wholesale prices.

“The return to low inflation is important,” he said. “There is no better foundation for economic growth than low inflation and its near cousin, low interest rates. It is the monetary equivalent of a tax cut.”

Kudlow predicted economic growth of roughly 3% in 1992, with a modest 1% advance in the first quarter and a speed-up in the final three quarters.

“I expect a moderate economic recovery,” Kudlow said. “A tepid recovery is under way. While there are areas of weakness, on balance the data do not reflect a double-dip recession.”

Even so, he said, unemployment will decline only to 6.4% in 1992 from 6.8% last November. December’s unemployment rate is scheduled for release today.

The weekly jump in jobless benefits claims occurred in a holiday-shortened workweek, prompting analysts to speculate that the numbers are lower than they would have been in a full five days. For most of the current recession, the volatile weekly jobless claims have bounced between 400,000 and 500,000.

AFL-CIO President Lane Kirkland, testifying before the Senate Budget Committee on Thursday, called for an expansion of jobless benefits. Kirkland also called for a $60-billion economic recovery program to create jobs through increased grants to states and local governments and through accelerated public works spending.

“The country is locked in a vicious downward cycle of production cuts, job losses, wage cuts and reduced consumer spending,” the labor spokesman said. “Only vigorous government action--including a short-term economic stimulus and long-term economic planning--will break the cycle and turn things around.”

Times staff writer William J. Eaton also contributed to this story.

The Economic Report

Wholesale prices fell in December and for all of 1991, the government said. It was the first annual decline in five years. Among the details: Producers: The Labor Department’s producer price index, which measures prices from factories and farms, dropped 0.2% in December and was down slightly for the year. Energy prices led the decline, followed by food costs and cars. Unemployment: The department said new claims for unemployment insurance jumped by 22,000 to a seasonally adjusted 458,000 for the last week in December. Analysts said that was within the current levels. Outlook: Analysts suggested that the news would increase the possibility that the Federal Reserve Board would cut interest rates again to stimulate the economy. Consumer price reports due next week are predicted to show a modest rise for December and the year, bringing consumer inflation for 1991 in at slightly less than 3%, less than half of the 6.1% rate in 1990.