Sharp Drop in Cost of Energy Helps Lower Wholesale Prices : Economy: July results further ease investors’ worries that inflation is heating up and interest rates may rise.
A sharp drop in energy prices helped push wholesale prices lower for the second straight month in July, the government said Thursday, further easing investors’ worries that inflation is poised for a comeback and further relieving pressure on the Federal Reserve Board to raise interest rates.
“Inflation hasn’t retreated to the sidelines, it’s gone all the way back to the locker room,” said Sung Won Sohn, chief economist at financial services giant Norwest Corp. in Minneapolis. “It won’t be back in the game until next year at the earliest.”
The news sent long-term Treasury bond yields to a new record low of 6.39% in euphoric morning trading, but yields firmed to close at 6.43% following the final leg of the government’s regular quarterly refunding.
The Labor Department said wholesale prices fell an unexpected 0.2% last month after dropping an even steeper 0.3% in June. It was the first back-to-back decline in two years, as producers had a tough time raising their prices amid the nation’s tepid economic expansion.
Analysts’ hopes that inflation will remain in check over the next several months were bolstered by two other reports released Thursday.
The Commerce Department said retail sales rose only 0.1% in July, while a second report by the Labor Department said the number of Americans filing first-time requests for unemployment benefits nationwide dipped by 3,000 last week.
The 0.2% decline in the Labor Department’s producer price index for July largely stemmed from a 1% drop in energy prices--brought on by a glut of crude oil on world markets--and a 0.1% dip in the cost of food.
Inflation showed signs of heating up last spring, but prices dropped sharply in June. Analysts became worried again after Fed Chairman Alan Greenspan told Congress last month that he and his policy-makers would nudge short-term rates higher if inflation showed signs of picking up again.
So Thursday’s report showing another price drop brought new sighs of relief from economists. “I think the Fed will be content to sit on its hands for a while,” said Arnold Shindler, a vice president and economist at Bankers Trust Co. in New York.
Low inflation, of course, is a double-edged sword for consumers. Low prices allow buyers to stretch their dollars, while lower interest rates make borrowing less expensive and homeownership more affordable.
But the low inflation also reflects a sluggish economy and hurts new savers by lowering rates paid on bonds, certificates of deposit and other types of fixed investments.
And while some investors may shift their money into mutual funds and help prolong the bull market in stocks and bonds, today’s economic sluggishness is also preventing companies from hiring new workers.
“Low inflation is great if you have a job and some money to spend, but it doesn’t do you much good if you’re out of work or flat broke,” said John Tuccillo, chief economist for the National Assn. of Realtors in Washington.
Although the savings wholesalers enjoyed last month trickled down to consumers, many Americans kept their wallets in their pockets.
The modest 0.1% rise in retail sales in July was constrained by a sharp 0.7% drop in auto sales, which largely offset gains recorded by department stores, restaurants and other retailers.
Analysts were cheered that consumers were willing to purchase discretionary items such as new clothes and appliances last month, but worried that spending could screech to a halt if the economy doesn’t show new signs of strength soon.
Producer Price Index for Finished Goods
Seasonally adjusted change from prior month:
July 1993: -0.2%
Source: Labor Department
