Wholesale Prices Drop 0.6% in May

Wholesale prices fell by the largest amount in more than two years in May, helping to ease concerns that a spike in energy costs earlier in the year might spell inflation troubles.

Meanwhile, May retail sales tumbled by the largest amount in nine months, a decline that was blamed on unusually cool weather during the month and was not seen as evidence that consumer spending, the engine that drives the economy, was threatening to sputter out.

The Labor Department reported Tuesday that wholesale prices fell 0.6% last month, with three-fourths of the drop attributed to falling energy prices. Food costs also fell, thanks to a big drop in vegetable prices.

Excluding food and energy, so-called core inflation was contained as well, edging up 0.1%, compared with a 0.3% increase in April.

The Commerce Department said retail sales dropped 0.5%, the first decline since August and the biggest drop since a 0.5% decrease in June of last year.

Analysts noted that the decline, which was bigger than the 0.2% drop that had been expected, followed a 1.5% increase in April.

“After having emptied their wallets in April, consumers took a bit of a vacation in May, and retailers felt the pain,” said Joel Naroff, chief economist at Naroff Economic Advisors Inc.

Cool weather damped sales of summer clothes, but with temperatures rising, many economists predicted a rebound in June. They also said the trend for consumer spending, which accounts for two-thirds of total U.S. economic activity, was likely to remain strong as employment growth continued in the months ahead.

In further evidence that the economy is on solid footing, the 600,000-member National Federation of Independent Business reported Tuesday that its small-business optimism index rose to 100.8 in May, a point higher than April, with eight of the 10 components pointing to strength in the months ahead.

The 0.6% drop last month in wholesale prices, the biggest since a 1.5% plunge in April 2003, was much bigger than the 0.2% decline analysts had expected. The government reports on consumer prices today, and analysts predict a small 0.1% rise, compared with a 0.5% spurt in April.

Over the last 12 months, wholesale prices have risen 3.5%, but excluding food and energy the increase has been a more modest 2.6%.

The 3.5% drop in energy costs in May was the biggest decline since a 7.2% plunge in April 2003. Gasoline prices fell 9.9%, and home heating oil was down 7.8%.

The 0.3% decrease in food costs was led by a 15% drop in the cost of vegetables, which offset a 19.5% jump in egg prices.

Outside of food and energy, the price of cigarettes was up 0.8%, but the price of passenger cars fell 0.2% and computer prices were down 4.8%.

In retail sales, purchases of motor vehicles fell by 1.6% in April, while demand at clothing stores was down 0.8% and sales at gasoline stations fell 1.6%, reflecting in large part the drop in pump prices during the month.