News on Inflation, Inventories Hints Recovery Starting : * Economy: Wholesale prices increase a modest 0.2% in February. Business stockpiles drop 0.4% in January.

From Associated Press

Wholesale prices rose a moderate 0.2% last month as lower energy costs helped counter a sharp rise in food prices, the government said Friday.

Analysts said heavy rains and flooding in California and Texas pushed up food prices, but said there was no indication that the underlying inflation rate would rise out of control even as the economy exhibits new signs of life.

A second report Friday from the Commerce Department said businesses lowered inventories for the first time in five months. January's 0.4% drop in stockpiles marked the first decrease in unsold goods since August.

Analysts said the inventory reduction, coupled with a report earlier this week of a retail sales improvement in February on top of one in January, could bring increased production and a growing economy in the months ahead.

"At this point, these are the types of economic conditions you want to have," said Donald Ratajczak, director of economic forecasting at Georgia State University. "The recovery is probably very near if not already here, and there is no inflation."

The wholesale price report was welcomed by the stock market. The Dow Jones industrial average rose 27.28 to 3,235.91.

The Labor Department said the 0.2% increase in its producer price index followed two monthly declines. So far this year, prices at the wholesale level are falling at an annual rate of 0.5%.

Analysts said the recession has banished inflation as a threat for some time to come.

Many forecasters were predicting that wholesale prices would rise 2% this year and consumer prices 3%. Coupled with the performance last year, that would give the country its best news on inflation since the mid-1960s.

While food prices at the wholesale level fell in eight of the last nine months, they climbed 1.1% in February, their biggest increase since January, 1990.

The jump was led by a 26% rise in vegetable prices, which was blamed on shortages caused by heavy rains in California and Texas. Prices rose more modestly for eggs, beef and pork.

Energy prices fell for a third straight month, although the 0.1% decline was much smaller than the December and January decreases.

Gasoline was up 1.9% and home heating oil 16.2% last month, but those gains were offset by 1% drops in electricity and natural gas prices.

The spate of good economic news in recent days--rising retail sales, factory orders and home sales--has sent some economists rushing to boost their growth forecasts. Many are predicting a tiny gain in the January-March quarter and a respectable 2.5% of growth in the next quarter.

William Dunkelberg, chief economist for the National Federation of Independent Businesses, said its February survey showed increasing optimism among small businesses.

Supporting that view, 47% of 490 executives surveyed in a New York Times-CBS News poll said they believe that the economy is getting better. Only 9% believed that things were getting worse.

Some economists, however, cautioned against reading too much into the upswing in confidence, noting that the economy was still facing major problems: weak banks, falling real estate prices and heavy debt.

"I sense that the mood has improved from the worst of the winter, but there is still an awful lot of skepticism about the staying power of this recovery," said Roger Brinner, an economist at DRI-McGraw Hill.

Another report Friday from the Federal Home Loan Mortgage Corp. showed that the average interest rate for 30-year, fixed-rate mortgages climbed to 8.88% this week, highest in five months.

Outside the volatile food and energy categories, wholesale prices rose 0.1% in February, the best performance since June.

Prices for passenger cars, alcoholic beverages and soap fell last month, helping offset price increases in magazines and prescription drugs.

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