Prices Decline 0.2% as Economy Strengthens Without Inflation
Prices at the wholesale level fell in February, the Labor Department said Thursday, as indications of a strengthening economy did little to stir inflation.
The department said the producer price index declined 0.2%, the first drop since an identical fall last June and the biggest since the 0.4% reduction in October 1994. The index had risen 0.3% in January.
With the often-volatile food and energy sectors removed, the so-called core rate inched up by 0.1%, contrasted with a decline of 0.1% in January.
The new figures are substantially better than Wall Street’s estimates of an overall increase of 0.1%, or 0.2% when food and energy are left out.
“The core came in a little better than expected, and we got a reversal in some of the components that boosted PPI last time,” said Steve Ricchiuto, chief economist at Barclays de Zoete Wedd Government Securities Inc.
“Clearly it is a more favorable inflation number than anyone had been anticipating,” he said.
The Labor Department also reported Thursday that the number of Americans seeking first-time jobless benefits declined by 10,000 to 353,000 in the week ended March 9.
The four-week moving average, a clearer pattern of benefit needs, also declined, to 364,000, a reduction of 7,000.
Last Friday, the department reported a huge jump in job creation in February, suggesting to the stock and bond markets that the economy might be bouncing back from tepid activity in January at a faster pace than expected.
Wall Street took the position then that the ebullient job growth made it much less likely that the Federal Reserve Board would cut short-term interest rates when policymakers meet this month, and that sent stocks and bonds into a tailspin.
Meanwhile, a new study adds further weight to the widely held belief that the government’s measure of inflation is overstated.
Research by economists David Wilcox of the Fed and Matthew Shapiro of the University of Michigan found the overstatement to be about 1.1 percentage points annually. A copy of the study was obtained by Reuters.
Many economists think the consumer price index is overstated, most notably Fed Chairman Alan Greenspan, who has advocated the use of a lower, modified version of the CPI to index federal entitlement programs.
Greenspan’s remarks on the CPI last year led to the appointment by Congress of a blue-ribbon panel to study it.
In an interim report, the panel, chaired by former White House economic advisor Michael Boskin, estimated the CPI overstatement at about 1.5%. The Boskin group is expected to issue a final report by June.
If inflation is lower than it now appears, the implications include the possibility of lower interest rates and smaller cost-of-living adjustments to wages, benefits and contracts.
Inflation is already relatively low. For all of 1995, the CPI posted just a 2.5% gain.
But Thursday’s data on inflation makes it clear that the economic growth, whatever its vitality, is not being accompanied by price pressures.
The improvement was widespread in February, with energy prices declining 0.7%, following a 2.7% increase in January, and food prices falling again, dropping 0.3% after a 0.2% reduction in January.
There were also indications that little inflation is in the pipeline, with goods at the intermediate level of production dropping 0.4% and materials before manufacturing declining 0.7%.
Gasoline prices fell 4.2% in February and passenger car prices recorded an increase of 0.1%.
Alan Ruskin, economic research director at Idea Inc., said, “My concern is that oil prices have bounced backed by 15% since then and that this is all going to unwind come the March number, when you can probably add 0.2% to 0.3% from energy back into the total.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Producer Prices
Seasonally adjusted index of finished-goods prices, 1982=100:
Feb. 1996: 129.7
Source: Bureau of Labor Statistics
