Producer Prices Dip for the First Time in 2 Years

Tumbling food costs helped wholesale prices retreat for the first time in more than two years in January, the government said Friday, surprising Wall Street and suggesting that inflationary pressures remain largely contained despite the continuing economic expansion.

The Labor Department said the producer price index fell 0.3% last month, after rising a revised 0.6% in December.

However, the so-called core rate, which excludes the often-volatile food and energy sectors, was unchanged in January after rising 0.1% in December. Economists believe this more closely tracks the pattern of inflation.

The decline in the January PPI was not expected by Wall Street, which had forecast an overall increase of 0.3%, with the core rate up 0.2%.

“Whoosh! It almost leaves you speechless,” said Hugh Johnson, chief investment officer at First Albany, a securities dealer in New York. “It doesn’t say much for forecasters.

“Despite the fact that the economy has been recovering since March of 1991, there are still very few signs of upward pressure on prices,” he said. “That’s very, very unusual.”

Despite the good news, the Dow Jones average of 30 industrial stocks, which broke the 7,000 level Thursday for the first time, retreated 33.48 points to close at 6,988.96. But a scary producer price report could have triggered a much sharper sell-off.

The bond market rallied with yields on 30-year Treasury bonds dropping to 6.53% at the close, the lowest level since Dec. 27 and down from 6.62% late Thursday. Lower bond yields, if sustained, can translate into lower mortgage rates for home buyers.

The producer price index measures the cost of goods before they reach consumers. Its movements offer important clues for the future behavior of the consumer price index, which tracks the price of both services and retail goods.

January’s drop in prices of producers’ finished goods was the first since a 0.4% decrease in October 1994. It was helped by a 1% decrease in foods, the steepest in 5 1/2 years, and a 0.2% decline in energy.

But even excluding food and energy, where prices can fluctuate wildly, core prices were unchanged last month after rising just 0.1% in December.

Another report Friday showed production at the nation’s factories, mines and utilities was unchanged in January after rising a 0.5% in December. At factories alone, production fell 0.2% after strong gains in November and December.

“This is not a sign that manufacturing is going down. It’s more like it’s catching its breath,” said economist Stuart G. Hoffman of PNC Bank Corp. in Pittsburgh.

The operating rate for U.S. industry slipped to 83.3% in January from 83.5% a month earlier, indicating room for moderate growth without inflationary bottlenecks developing.

In another sign of a well-balanced economy, business inventories fell 0.1% in December after holding unchanged in November, the Commerce Department said. An unwanted buildup in inventories can cause layoffs and production cutbacks as businesses try to clear warehouses and back lots.

For all of last year, producer prices rose 2.8%, the biggest increase in six years, but core prices rose only 0.6%. This year, economists expect an overall producer price rise of about 2.5% and a core increase of roughly 1.5%.

Last month, prices fell for beef, pork and poultry, and eggs dropped 19.8%. However, vegetables shot up 4.2%, pushed higher by big increases for squash, eggplant, green peppers and broccoli.

Analysts are expecting a bigger rise in fruit and vegetable costs in February because of a late-January freeze in South Florida.

Within energy, a 2.8% drop in fuel oil prices was counterbalanced by a 2.6% increase in gasoline.

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Producer Prices

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

(please see newspaper for full chart information)

January 1997: 133

Source: Bureau of Labor Statistics