Wholesale Dip Steepest Since March, 1991 : Economy: June’s 0.3% decline in the producer price index follows months of increases that had raised inflation concerns.
A key measure of wholesale prices recorded its biggest decline in more than two years, putting a damper on fears that inflation will accelerate or that the Federal Reserve Board will raise interest rates.
The widely watched producer price index on finished goods fell 0.3% in June, spurred by the largest drop in vegetable prices ever, the Labor Department reported Tuesday. It marks the biggest drop since March, 1991, and follows months of increases that had raised fears that inflation might be heating up.
But June’s decline--fueled by a 37.9% drop in fresh vegetable prices, a 5.9% drop in tobacco prices and a 0.5% decline in energy prices--suggests that a slack national recovery has dampened consumer demand, economists said.
“It reflects the fact that we’re struggling along at sluggish growth rates,” said Gary L. Ciminero, chief economist at Fleet Financial Group in Providence, R.I. “Slow growth is about all we can hope for, with some regions experiencing rapid declines, including parts of the East Coast and West Coast.”
The report lessens the likelihood that the Fed will step in to raise short-term interest rates to tighten the money supply, economists said.
“I think the Fed is opting to jawbone inflation rates lower instead of raising rates, which they dare not do in this environment of slow growth and with a federal budget agreement hanging in the balance,” Ciminero said.
During the first six months of 1993, the index rose 2.4%, compared to 1.6% in all of 1992. The index showed no change in May and a 0.6% increase in April.
Nevertheless, economists said, June’s drop is not sustainable. They predicted that 1993 will see an overall inflation rate of between 3% and 3.5%.
June’s producer price index report “is good news, but not as good as appears on the surface,” said Robert G. Dederick, chief economist at Northern Trust Co. in Chicago. “Just as we had numbers earlier in the year that were above the underlying trend, I think this number is below it.”
On Tuesday, Deputy Treasury Secretary Roger Altman said he expects a “low inflationary environment” in the United States to continue possibly into 1995 as a result of current “modest growth” anticipated through next year.
The Clinton Administration is forecasting economic growth of 2.5% for this year, Treasury Secretary Lloyd Bentsen told a meeting of business leaders in Cleveland on Tuesday.
June’s producer price report was marked by a confluence of onetime events: the precipitous drop in fresh vegetable prices, reflecting steep price increases earlier in the year; the drop in energy prices, and the slide in tobacco prices, reflecting cuts by Philip Morris Cos.
Excluding the volatile energy and food indexes, the so-called core producer price index for finished goods showed a decline of only 0.1%.
Economists expect only a modest increase in the consumer price index, due out today. The CPI rose 0.1% in May.
Prices for vegetables, particularly tomatoes, fell in June as new supplies came into the market, said Harry Briggs, an economist for the Bureau of Labor Statistics. Earlier in the year, vegetable prices had risen partly as a result of crop losses from spring storms in Florida, he said.
Producer Price Index for Finished Goods
Seasonally adjusted change from prior month.
June, ‘93: -0.3%
May, ‘93: 0%
June, ‘92: +0.2%
Source: Labor Department
