Inflation Retreats as Energy Prices Fall

Wholesale inflation retreated a bit in May as energy prices declined after two months of troubling gains, government data released Tuesday show.

The good inflation news failed to cheer financial markets for long, as many private economists continued to warn that a Federal Reserve Board interest rate increase was still likely next month.

The Labor Department reported Tuesday that its producer price index declined 0.1% last month, a better-than-expected showing that initially triggered a rally in both stock and bond prices.

However, the Dow Jones industrial average, which was up nearly 41 points in morning trading, gave up all of those gains and closed down 19.21 at 5,668.66. After an initial surge, demand for the 30-year Treasury bond fell, pushing the yield back up to 7.12%, unchanged from Monday when it had climbed to the highest level in more than a year.

Many private analysts said financial markets remained extremely jittery despite the good inflation news, fearing that faster-than-expected growth will force the central bank to hike rates when its policy committee next meets July 2-3.

“You can’t do much better than we have been doing on the [producer price index], but that doesn’t stop the Fed from worrying about inflation. They are focused on wages, and wages are starting to creep up,” said Cynthia Latta, an economist at DRI-McGraw Hill Inc.

The government was scheduled to report the closely watched consumer price figure today. In advance, economists were predicting moderation at the retail level as well, reflecting lower energy prices. Many forecast a 0.3% rise in consumer prices in May, down from a 0.4% April advance.

Excluding the volatile energy and food sectors, the underlying inflation rate showed no change in May and would have actually fallen had it not been for a huge 3.2% jump in tobacco prices, the biggest rise in this category since a 5% increase in December 1993.

Not all analysts were in agreement over whether the Fed will begin raising interest rates in July, which would be the first increase since February 1995.

Bruce Steinberg, economist at Merrill Lynch in New York, said the benign producer price report “supports our minority view that the Fed will not tighten policy” next month.

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Producer Prices

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

May 1996: 130.8

Source: Bureau of Labor Statistics