Drop in Wholesale Prices Fails to Ease Worries

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.

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