Key Gauge Hints That Inflation Is Building

A report by the nation’s manufacturers of the first rise in prices for raw materials in 16 months sparked concerns in financial markets that inflation is heating up.

The disturbing figures came in a mixed bag of reports Tuesday--the first monthly decline in nearly a year in a key gauge of future economic activity and a big drop in construction spending, but continued strength in the industrial economy.

The National Assn. of Purchasing Management said its monthly index of business activity rose to 55.2 in May from 52.8 in April--a much stronger showing than analysts had expected and an indication that the industrial sector is strengthening.

Unexpected, however, was the rise in the group’s price index, which jumped to 52.2 in May from 49.9 in April. It was the first time since December 1997 that manufacturers indicated they were seeing higher prices for commodities ranging from paper to petroleum.

The report on prices rattled financial markets, which have been concerned that the Federal Reserve will follow through on its threat to raise interest rates if it sees inflation building up in the economy.

The Dow, down almost 270 points last week as inflation jitters grew on Wall Street, closed up 36.52 points. Treasury yields rose 0.11 to close at 5.94%.

The other economic gauges released Tuesday suggested that inflationary pressures, for the time being, are limited.

The Conference Board, a nonprofit business research group, said that its Index of Leading Economic Indicators--a gauge of future economic activity--declined in April for the first time since June 1998, suggesting some softening in the economy.

The Conference Board said its Index of Leading Economic Indicators--a gauge of future economic activity--fell 0.1% in April to 107.1, the first decline since June 1998 when the gauge fell 0.2%, suggesting some softening in the economy.

A revised figure for March showed the index unchanged at 107.2 from the previous month after five consecutive monthly increases.

Analysts had been expecting a slight rise in the index.

Michael Boldin, director of business cycle research at the Conference Board, said that a single month’s dip in the index did not necessarily signal that the economy’s strong growth would falter. “We look at trends over six months before we have any concern,” Boldin said. He noted that despite April’s decline, the index was up some 1.3% over the last six months. “This looks like only a temporary pause, although last week’s drop in the stock market adds some complications,” Boldin said.

The Conference Board’s index of coincident indicators, which measure current activity, rose 0.2% in April, while its lagging index, which reflects the economy’s past performance, rose 0.4%.

Economist Jerry Jasinowski, who is president of the National Assn. of Manufacturers, agreed, saying: “The mild decrease in the index comes after a long sequence of increases and is more of an anomaly than the start of a negative trend.”