Wholesale Prices Drop Sharply in Jan.
Competitive pressure from the strong dollar and falling energy costs sent wholesale prices sharply lower in January, according to government data released Wednesday, further evidence of a lack of inflation in the booming economy.
The Labor Department’s producer price index fell 0.7% last month, its steepest drop in more than four years. It had declined 0.2% in December.
“We keep saying that this is as good as it gets, but it keeps getting better,” said Joel Naroff, an economist at First Union Corp. in Philadelphia. “This was another sign that inflation is not an issue right now.”
The January drop in the PPI is the biggest since it fell 1% in August 1993.
It amazed economists who, in a Reuters survey, had predicted a decline of just 0.2%, and it sparked murmurings in the stock market about the possibility of deflation, or broad declines in prices.
In forecasting the January figure, many economists failed to gauge the full extent of the effect on energy prices from the unusually warm winter temperatures linked to the El Nino weather phenomenon. As demand for heating oil and other fuels weakened at the start of the year, energy prices plummeted 3.7%.
Food prices also edged lower, falling 0.4%.
However, even with the often volatile food and energy costs stripped out of the index, the so-called core PPI fell 0.1%.
A Commerce Department report on housing starts indicates the economy is showing few signs of slowing despite Asia’s crisis.
The department said builders broke ground on new homes at a slightly slower pace in January, although permit applications for future construction hit an eight-year high.
Total starts fell 0.3% to a seasonally adjusted annualized rate of 1.53 million in January. Permit applications climbed 3.5% to a rate of 1.53 million a year.
The overall PPI and core index both posted their third consecutive monthly declines, signaling a broad trend of flat and even falling prices in the goods sector.
Most economists, however, dismissed the prospect that the economy might be on the verge of deflation. Price declines in goods may be more than offset by higher prices for services such as health care and education. Service costs, which make up about 60% of consumer prices, may face upward pressure because of low unemployment, now at 4.7%.
“The good news is that producer prices are holding steady or declining, which makes more room for wage increases,” said Christine Chmura, chief economist at Crestar Financial Corp. in Richmond, Va.
Still, many economists said the January PPI drop is remarkable because it comes at a time when the economy is operating at full tilt and heading toward an eighth year of continuous expansion.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Housing Starts
Seasonally adjusted annual rate, millions of units:
Jan.: 1.53
Source: Commerce Department
Producer Prices
Index of finished-goods prices; 1982=100, seasonally adjusted:
Jan: 130.5
Source: Labor Department
