Wholesale Prices Increase a Steep 0.5% : Economy: Report sparks concerns that Fed may not cut rates.

Surging food and motor vehicle costs in November sparked the steepest jump in wholesale prices since January, sparking concerns that the Federal Reserve Board may not cut interest rates next week.

The Labor Department reported Tuesday that its producer price index for finished goods jumped 0.5%, the biggest increase since a similar advance in January.

It was the third gain in five months and followed a 0.1% dip in October. The PPI measures cost pressures before they reach the consumer level.

The stock market fell after the news, with the Dow Jones industrial average losing 9.40 points to close at 5,174.92. Bond yields rose at first, but later fell back to record only a light increase.

But in a separate report, the Commerce Department said the U.S. trade deficit, after ballooning to the second-largest ever during the April-June quarter, shrank by 8.7% from July through August to $39.48 billion. Exports improved, while Americans curbed their appetite for imported goods.

Fed policy-makers said the U.S. economy will continue its solid growth in 1996, even amid signs the expansion is cooling.

Their remarks hint that they see no need to cut interest rates at this time to spur economic growth.

The U.S. output of goods and services will expand “2% to 2 1/2%” in 1996, said Thomas C. Melzer, president of the Federal Reserve Bank of St. Louis. “The expansion has matured nicely,” he said.

A similar assessment came from Fed Gov. Edward Kelley, speaking to reporters at an Ohio bankers conference. “The economy will have a slow to medium growth path over the coming year,” he said.

Despite the market reaction, many analysts said the PPI was exaggerated by problems in adjusting new-model vehicle prices for seasonal variations. The problems, they said, resulted from the introduction of many 1996 model cars and light trucks in November, rather than in October as usual.

Many also noted that prices of finished goods at the wholesale level for the year’s first 11 months are up at an annual rate of just 1.8%, similar to the 1.7% advance during 1994.

Lawrence H. Meyer, head of an economic forecasting service, said the seasonal adjustment aberration will probably be absent when the consumer price index is released Thursday, because many auto dealers continue to cut prices.

Before the PPI report, most economic analysts thought prices at the consumer level would rise 0.2%.

Excluding the volatile food and energy costs, the core rate of wholesale inflation rose 0.4%.

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U.S. Trade

Current account deficit, quarterly balance in billions of dollars: -$39.5

Source: Commerce Department

Producer Prices

Index of finished-goods prices seasonally adjusted: 1982 = 100: 128.6

Source: Labor Department