ECONOMY : Wholesale Prices Leap in July; All Eyes Are Now on the Fed : Indicators: Many analysts see another boost in interest rates when the board’s policy-makers meet next week.
Wholesale prices surged ahead at their fastest rate in more than a year last month, the Labor Department said Thursday, persuading many analysts that the Federal Reserve Board will almost certainly raise interest rates again when it meets next week.
The specter of another rate hike--which would be the fifth in six months--sent bond yields soaring. The yield on the benchmark 30-year bond, which moves in the opposite direction of bond prices, rocketed to 7.65% from 7.57% on Wednesday.
The Dow Jones industrial average, off nearly 30 points at midday, closed down 15.86 at 3750.90.
Separate government reports showing that retail sales slipped a modest 0.1% in July and that first-time claims for unemployment benefits rose slightly last week failed to squelch traders’ concerns that the Fed will raise its short-term discount rate when its policy-making Federal Open Market Committee meets Tuesday.
“Rates are probably going to go up one-quarter or maybe even one-half of a point next week,” said Charlie Okada, who runs the trading desk at Sanwa Bank’s Los Angeles headquarters. “Another rate hike is no longer a possibility, it’s a probability. “
The Fed has already raised rates four times since February in an effort to discourage more borrowing by businesses and consumers. Less borrowing results in less spending, which slows the economy and dampens inflation.
But the 0.5% leap in wholesale prices last month indicates that those previous rate hikes might not have been enough to get the job done, analysts said.
July producer energy prices rose 2.5%, led by a huge 8% increase in the cost of gasoline. Food prices climbed 0.5%, fueled largely by a staggering 43% increase in wholesale coffee prices caused by killer frosts in Brazil.
The so-called core rate of inflation, which excludes volatile food and energy costs, rose only 0.1%. Even so, analysts noted, inflation at the wholesale level was running at a 2.2% annual rate through July, compared to a smaller 1.7% rate for the first seven months of last year--an increase the Fed may find unacceptable.
“I think the price and inflation data we’ve been seeing will be the ammo the Fed needs to justify raising interest rates,” said Robert Dederick of Northern Trust Co. in Chicago.
Analysts also said the slight drop in retail sales in July and the modest rise in first-time unemployment claims also belied the economy’s underlying strength.
For example, the 0.1% dip in retail sales was led by a 1.7% decline in automobile purchases. However, analysts said auto sales didn’t drop because consumers aren’t buying new cars; instead, car lots are being emptied so fast that Detroit can’t keep up with demand.
Some automobile dealers have long waiting lists for their most popular models. Manufacturers are planning price hikes for some of their 1995 models, which economists say will worsen inflationary pressures in the months ahead.
And while new claims for jobless benefits rose to 321,000 last week from 315,000 the week before, the four-week moving average of claims--a more reliable indicator of overall employment trends--dropped for the third week in a row.
Producer Price Index
For finished goods; seasonally adjusted change from prior month:
July 1994: 0.5%
Source: Labor Department
Seasonally adjusted, in billions of dollars:
July 1994: $184.8
Source: Commerce Department