Despite the Federal Reserve Board's fears that the nation's recovery is threatening to let inflation out of its cage, the Commerce Department said Thursday that retail sales and wholesale prices fell in April--fresh evidence that the economy is growing at a sustainable pace without putting too much upward pressure on prices.
The government reports, which show retail sales dropping a surprising 0.8% and producer prices dipping 0.1%, quelled some Wall Street investors' concerns about inflation--at least for the day--and triggered a rally in the stock and bond markets.
The reports were also welcomed by the Clinton Administration, which said the data reflects an economy that is growing steadily but is in no danger of overheating.
But many private analysts said the news probably won't be enough to dissuade the Federal Reserve from raising short-term interest rates again soon in its controversial effort to prevent inflationary pressures from building.
"I still think the Fed is going to move rates higher soon because it's paranoid about inflation, even though there's no inflation to be seen," said Sung Won Sohn, chief economist at financial services giant Norwest Corp. in Minneapolis.
The Fed has raised its federal funds rate three times since February in an effort to discourage more borrowing, slow economic growth and keep inflation in check. Senior board officials recently told The Times that the nation's central bank is poised to raise interest rates repeatedly in coming months and hinted that the next increase could come within days.
Thursday's reports showing surprising weakness in retail sales and wholesale prices last month won't be enough to make the Fed change its course, analysts said.
"The Fed doesn't make policy based on one set of numbers," said David Jones of New York investment bankers Aubrey G. Lanston & Co., adding that he thinks the central bank will again raise short-term rates by the time its policy-making Federal Open Market Committee meets Tuesday.
While the Fed's strategy of raising interest rates to cool the economy is controversial, the news of the sharp drop in retail sales would indicate that it is also working.
Analysts blamed the unexpected dip on the rise in rates--a rise that has accelerated since the Fed launched the first of its three rate increases Feb. 4.
"Most consumers cut back on their spending when interest rates go up, and rates have gone up a lot lately," said Sohn at Norwest.
But despite those rising rates, the 0.1% drop in producer prices--which measures inflation at the wholesale level--shows that manufacturers are still having trouble raising the prices they charge retailers.
In the first four months of the year, producer prices have risen at a 2.7% annual rate, compared to a 4.4% rate in the same period a year ago, the Commerce Department said. Last month's core rate of inflation--which excludes the volatile food and energy categories--rose only 0.1%.
In a third report that indicated the economy's growth may be slowing, the Labor Department said first-time claims for unemployment benefits rose by 26,000 to a seasonally adjusted 378,000 last week. Economists had predicted claims would fall by about 10,000.
Although many analysts said Thursday's reports show that the economy is already slowing and that the Fed doesn't need to raise interest rates again, others said inflationary pressures are building even though they haven't shown up on store shelves or at the checkout counter.
For example, prices for oil--which is used to make literally millions of different products and greatly affects companies' manufacturing and distribution costs--have surged over the last few weeks due to production problems in the North Sea and civil unrest in Yemen.
Retail Sales: Seasonally adjusted, in billions of dollars: $183.6 April 1994
Source: Commerce Department
Producer Price Index: For finished goods; seasonally adjusted change from prior month. -0.1% April 1994 Source: Labor Department