1. Archive

Report on prices eases inflation fears

Wholesale prices held steady last month, the government said Friday in a report welcomed by Clinton administration officials who hope continued low inflation will keep the Federal Reserve from boosting interest rates.

The May figures for inflation at the wholesale level were the best this year, held down by declines in energy and food costs. The news sparked a rally in financial markets.

In less promising economic news, a second report showed that retail sales barely budged in May, rising an anemic 0.1 percent, far below expectations. But even in that report, analysts noted that clothing and cars, two key areas for discretionary spending, posted gains during the month.

The administration and financial markets chose to focus on the Labor Department's Producer Price Index, which was unchanged in May following worrisome increases of 0.4 percent in March and 0.6 percent in April, the biggest one-month gain in 2{ years.

Stocks and bonds both rallied as the wholesale price report calmed anxieties that rising inflation would force the Federal Reserve to begin pushing interest rates higher, something the central bank has not done for more than four years.

"The PPI report tells us the Fed won't be tightening anytime soon," said Bruce Steinberg, an economist at Merrill Lynch in New York. "This report shows that the recent inflation scare was greatly exaggerated."

The administration, which often points to falling interest rates as a sign financial markets approve President Clinton's deficit reduction program, welcomed the inflation news.

Treasury Secretary Lloyd Bentsen said it "buttressed our feeling that what we had seen in the previous reports was an aberration." He told reporters, "I would assume (Federal Reserve Chairman Alan) Greenspan would find that encouraging too."

President Clinton met with Greenspan for an hour Wednesday night, and the White House made clear afterward it hopes the Fed will not drive rates higher.

The new wholesale inflation report will be followed Tuesday by a report on consumer prices in May. Economists said they expected to see similar movements, forecasting a small increase in consumer prices of around 0.2 percent.

"Cold water has been thrown on any notion that a Federal Reserve tightening is imminent," said Robert Dederick, chief economist of the Northern Trust Co. of Chicago. "Inflation basically remains a non-problem."

For May, the Labor Department said that food prices actually fell by 0.1 percent, reflecting sizable declines in vegetable prices, while energy costs were down an even bigger 0.6 percent as gasoline prices dropped by 3.6 percent, the biggest decrease since December.

Excluding the volatile food and energy categories, wholesale prices rose only 0.2 percent with half of that gain blamed on a 2.1 percent spurt in tobacco prices. Car prices dropped 0.6 percent.

Wholesale prices have risen at an annual rate so far this year of 3.7 percent, far ahead of last year's overall increase of 1.6 percent.