Wholesale Prices Fall 0.1%, but Rise in ‘Core Index’ Worries Analysts

A drop in food and energy costs pulled wholesale prices down in May for the second month in a row--the first time in nearly three years that has happened.

But some analysts said a larger-than-expected increase in underlying inflation, including higher prices for tobacco, cars and women’s clothing, could signal trouble ahead.

The Labor Department said Friday that the producer price index, a gauge of inflation pressures before they reach the consumer, was down 0.1% last month. That matched April’s decline and marked the first time since June and July, 1991, that the index declined for two straight months.

Excluding the volatile food and energy components, the so-called core index rose 0.4% in May after edging up 0.1% the preceding month.

“It was a very poor number,” said economist Elliott Platt of Donaldson, Lufkin & Jenrette Securities Corp. “The core rate was double what was expected. It seems to be concentrated in apparel, automobiles and tobacco prices. It’s certainly a short-run negative for the bond market.”

Some analysts said the Federal Reserve Board, which has boosted short-term interest rates four times this year, will probably find the rising core rate disturbing and may send interest rates higher in August.

“On the surface, inflationary pressure is subdued,” said Wall Street economist Eugene Sherman of M.A. Schapiro & Co. “But beneath the surface, commodity prices are rising faster for the last six to 10 months. There is emerging scarcity in the labor market and among producers in terms of capacity availability. Normally, all of these things precede price inflation.”

“There is no compelling reason for the Fed to do anything. Things are settling down,” said Donald Ratajczak, who heads an economic forecasting project at Georgia State University in Atlanta.

Analysts and investors are awaiting Wednesday’s consumer price index report for May, which is expected to show a small increase.

Meanwhile, a consensus forecast of 52 prominent analysts surveyed in early June by Blue Chip Economic Indicators predicted that consumer prices will rise just 2.7% this year, unchanged from 1993.

The group said it foresees improved productivity because of pressures from foreign competition, corporate restructuring and modernizing. It also predicted that prices will be restrained by the Fed’s interest rate increases.

Inflation has been mild for more than three years, the best stretch in three decades. Last year’s 2.7% rise followed a 2.9% advance in 1992 and a 3.1% increase in 1991.

Wholesale food prices dropped 0.9% after declining 0.5% in April.

Energy costs slid 1% in May, with gasoline down 2.8% after a 1% advance in April.

Passenger car prices were up 0.8% after a 0.3% advance in April. Tobacco products posted a 1.9% gain after decreasing 0.9%. Women’s apparel rose 1.1% after declining an identical amount the month before.

Producer Price Index

For finished goods; seasonally adjusted change from prior month:

May, 1994: -0.1%

Source: Labor Department