March Prices Fall, but Pressure Showing

Tumbling energy costs kept wholesale inflation in check in March, the government said Friday, although a strengthening economy and underlying price pressures seemed to suggest that the Federal Reserve Board would raise interest rates again in the near future.

The Labor Department said the producer price index fell 0.1%. But the underlying “core” rate, which excludes often-volatile food and energy costs, rose an unexpected 0.4%.

At the same time, the Commerce Department said consumers slowed their buying spree last month, although strong upward revisions in retail sales for January and February caused analysts to reconsider just how strong the first quarter was.

“I was looking for growth of 3.5% to 4.0% in the first quarter, but now I think it may be more like 4.0% to 4.5%,” said David Jones, an analyst at Aubrey G. Lanston & Co.

Indications that economic growth accelerated from the 3.8% pace in the final three months of 1996 and that underlying inflation was showing unwanted vitality made it seem likely that the Fed will push interest rates higher again.

“An accumulation of hard evidence--subtle wholesale price pressures and strong retail sales--will provide cover for another Fed-led rise in short-term interest rates,” said Ken Mayland, the chief economist at Key Corp.

Fed policymakers are scheduled to meet May 20 to discuss interest rates. They increased short-term rates by a quarter of a percentage point on March 25.

Retail sales rose last month by 0.2% to a seasonally adjusted $215.6 billion after revised upwardly increases of 1.5% in February and 1.7% in January.

An unexpected drop in sales by auto dealers--after their strongest sales gain in a year during February--held down overall sales in March, the Commerce Department said.

The March retail sales gain was weaker than expected by Wall Street economists, who had forecast a more robust 0.6% pickup in business. However, several analysts raised the possibility that this figure also could be revised upward.

On the surface at least, it did not appear that producer prices, which have fallen for three months in a row, showed anything but benign inflationary pressures. They fell 0.4% in February and 0.3% in January.

The department said the drop in energy prices, which fell 3.4% after slipping 1.2% in February, was the largest decline in six years and reflected a warmer-than-expected winter.

Gasoline prices tumbled 4.0% after retreating 3.1% in February, while heating oil plummeted 9.9% after falling 1.1% in the month before.

However, with the often-volatile food and energy sector excluded, the picture was more threatening. This so-called core rate, which economists believe more closely tracks inflation than the overall figure, rose 0.4% after falling 0.1% in February.

Wall Street had estimated that overall prices would be unchanged, while the core rate would be up 0.1%.