Inflation Is in Check, April’s Prices Indicate

Wholesale prices inched up 0.2% in April, the Labor Department reported Tuesday, providing unexpected good news to economists who feared that rising energy costs would send prices higher.

The report may also give the Federal Reserve room to lower interest rates further, some economists suggested.

The April figures mean that over the first four months of the year, the producer price index, which measures inflation before it reaches the consumer, rose at an annual rate of 1%, the Labor Department said. That rate indicates that the economy is still in a weak recovery and that the underlying rate of inflation is well-behaved, many economists believe.

The April figures, the third straight monthly increase of 0.2%, came as rising energy costs were offset by a sharp drop in food prices, the government reported.

Energy prices rose 0.5% in April after jumping 1.2% in March. But food costs fell for the 10th month in the last year, at least partly because vegetable prices declined after an upward surge in February.

“Excellent news,” said Ken Ackbarali, senior economist for First Interstate Bancorp in Los Angeles. “This is better than our forecast--and we don’t mind being wrong when the index performs like this.

“This will help build consumer and business confidence and shows that inflation is not a major concern,” Ackbarali said.

The Labor Department report led to speculation that the Federal Reserve will further loosen its grip on the money supply by reducing interest rates again to help sustain the struggling recovery. The Fed last cut interest rates a month ago, after the government reported the 0.2% March rise in wholesale prices.

The Fed’s key discount rate, the interest it charges banks for loans, stands at 3.5%, with credit rates down to the lowest levels in nearly 20 years.

The central bank’s chief policy-making group, the Federal Open Market Committee, meets next Tuesday. But some economists predict that the Fed will not act so quickly this time.

“This kind of good news gives the Fed maneuvering room,” said William Spriggs of the Economic Policy Institute in Washington. “But with consumer confidence picking up, the Fed may be more cautious this time.”

Rather than calling for an immediate cut in rates, the steadying wholesale index “reduces the pressure on the Fed to move at all--in either direction,” Ackbarali said. “It can wait to see more evidence before acting.”

The Labor Department is to report on consumer prices today. Economists expect to see a similar pattern of higher energy costs offset by falling food prices to produce a similarly modest increase in the consumer price index.

The 18.1% drop in vegetable prices was largely attributed to a 56% decrease in tomato prices and a 49% decrease in sweet corn.

Gasoline prices, which have risen steadily this year, were up 1.4% in April after a March increase of 1.1%. Home heating oil jumped 4.6% last month, but the gains were offset by declines in natural gas and electricity. Even with the increases, gasoline prices are 1.9% lower than a year ago.

All other prices, excluding the volatile energy and food categories, rose 0.2% in the month, the same as the overall number.

The producer price index was 122.2 in April, compared to 121.1 a year ago. That means that a market basket of goods costing $121.10 a year ago would have cost $122.20 last month.