Finished-Goods Prices Fall Again in August
Prices charged by farms, factories and other producers fell in August for the eighth time in 10 months, good news for buyers but a scary development for businesses worried that profits will be crunched by deflation.
The prices fell a seasonally adjusted 0.4% last month, the Labor Department said Friday, bringing the seasonally adjusted annual deflation rate in the producer price index for finished goods to 1.4% for the year so far, compared with a price drop of 1.2% for all of 1997.
The August drop was the sharpest in seven months and exceeded analysts’ predictions.
“The decline just reflects the fact that the rest of the world is in various stages of recession, and raw materials and manufactured goods are cheap for us,” said economist William Dunkelberg of the National Federation of Independent Business.
While that means lower costs for buyers, it also spelled trouble for companies. Many can’t raise prices even though their labor costs are rising with unemployment remaining near a 28-year low.
In August, there were sharp price drops in gasoline, 8.5%; vegetables, 20.6%; and automobiles, 1.7%, reflecting the return to production at General Motors after strikes that lasted nearly two months.
The presence of deflation for many goods could give Federal Reserve policymakers leeway to reduce short-term interest rates later this year to offset the negative impact of the global crisis.
However, economist Joel L. Naroff of First Union Bank Corp. in Philadelphia said the central bank probably will wait for evidence the stock drop has caused consumers to curb their spending and probably won’t cut rates before November.
Nevertheless, the National Assn. of Manufacturers is calling on Fed policymakers to cut rates at their next meeting, Sept. 29.
“There is a risk of global deflation, which would emerge in the event that recession spreads even more broadly,” said Jerry Jasinowski, the association’s president. “The chances of this happening will be vastly reduced if the Federal Reserve cuts interest rates at the next meeting.”
Much of this year’s decline has come in energy costs, down 2.3% in August and at a 14.8% annual rate so far this year. But food costs also have fallen, 0.4% last month and at an 0.3% rate so far this year.
The Labor Department said “core” producer prices--excluding the volatile food and energy components--edged 0.1% lower in August and, for the first eight months of the year, have risen at just a 1.2% annual rate.
August’s price drop was propelled by the decline in gasoline--the largest for a single month since 1991. The cost of home heating oil and residential electricity also fell, but natural gas costs rose 1%.
Computer prices continued to drop, 4.5% last month.
And after a series of sharp increases, prescription drug costs fell 0.6%. Nevertheless, they still were 21.3% higher than a year ago.
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Producer Prices
Index of finished goods prices; 1982=100; seasonally adjusted:
Aug.: 130.2
Source: Bureau of Labor Statistics
