Producer Prices Make Leap in February
Producer prices shot up a percentage point in February, their biggest one-month rise in 10 years. But most of the increase was confined to energy and tobacco prices, which are considered poor indicators of inflation.
The producer price index, the Labor Department’s measure of wholesale prices, rose by a more moderate 0.3% when food and energy prices were excluded, yielding the so-called core rate. Still, even that gain was the core rate’s largest in the past year, except for an unusual 0.6% increase last September.
“You can certainly say that the best news on inflation is behind us,” said Mark Vitner, an economist at First Union Corp. in Charlotte, N.C. “The core rate of inflation is going to be higher this year.”
Vitner pointed to large price increases in goods used earlier in various processes of production, such as gold ore, construction sand and gravel and petroleum-based building materials. Those increases don’t show up in the wholesale price tally now, he said, but may eventually pressure it upward.
But because so much of Thursday’s wholesale price increase was limited to just two sectors of the economy, Wall Street chose to ignore it. After months in which it swooned at the slightest hint of inflation, the Dow Jones industrial average rose 499.19 points, closing at 10,630.60.
Economic analysts, meanwhile, stood by their predictions that the Federal Reserve’s Open Market Committee will raise interest rates by 0.25 point when it meets Tuesday.
“We care about these [producer price] numbers mainly insofar as they say something about what’s going to happen in the future,” said Bill Cheney, chief economist at John Hancock Financial Services in Boston. “And the parts of this number that are alarming are things that are unlikely to recur.”
The biggest ingredient in February’s wholesale price increase was a 5.2% jump in prices for energy products. It was the largest one-month gain since the 1990 Persian Gulf crisis, when wholesale energy prices rose by 7.5% in October.
Cheney said that although high oil and gas prices may infuriate consumers, they don’t necessarily fuel inflation--prices must keep rising for that. Cheney said that if oil and gas prices hold steady at their current elevated levels, then some pressure might eventually feed through to other parts of the economy, but not necessarily enough to constitute for an inflationary spiral.
Indeed, if cash-strapped U.S. consumers react to higher gas and heating oil prices by reining in other discretionary spending, they could cool the economy, not intensify the threat of inflation.
Another factor in February’s wholesale price increase was a 6.3% increase in cigarette prices--a big gain, but one that affected a limited number of purchasers. The Labor Department noted that if cigarettes were excluded from its basket of wholesale products, then the core rate would have been zero.
“I don’t think [Fed Chairman] Alan Greenspan is going to be looking at this producer price index and saying, ‘Here is the inflation that I thought there was,’ ” Cheney said. “It’s true that demand is exceeding supply in the U.S. economy as a whole, but this number doesn’t give any clue that that is happening.”
Until now, it appears, businesses have been able to absorb increases in raw material prices by upgrading their technology, thereby improving productivity and covering higher input costs with greater volume.
The key question, said Rajeev Dhawan, director of the UCLA Anderson Forecasting Project, is at what point rising raw-material prices outstrip productivity gains. Dhawan said he suspected February’s 0.3% increase in the core rate was evidence that productivity isn’t offsetting the input-price rises.
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Index of finished goods prices; 1993=100; seasonally adjusted:
Source: Bureau of Labor Statistics