Wholesale prices drop, easing inflation concerns

Wednesday, June 15, 2005

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

Meanwhile, May retail sales tumbled for the first time in nine months, a decline that was blamed on unusually cool weather during the month and 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 by 0.6 percent last month with three-fourths of the drop attributed to falling energy prices. Foods costs also fell during the month, thanks to a big drop in vegetable prices.

Outside food and energy, so-called core inflation was contained as well, edging up just 0.1 percent, compared to a 0.3 percent increase in April.

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

Analysts noted that the decline, which was bigger than the 0.2 percent drop that had been expected, followed a sizable 1.5 percent 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.

Cool weather dampened sales of summer clothes, but with temperatures heating up, many economists predicted a rebound in June. They also said the trend for consumer spending, which accounts for two-thirds of total economic growth, was likely to remain strong as employment growth continues in the month ahead.

The good news on inflation helped lift spirits on Wall Street. The Dow Jones industrial average finished the day up 25.01 points to close at 10,547.57.

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.

Federal Reserve Chairman Alan Greenspan, testifying to Congress last week, said the economy, despite being buffeted by a spike in energy prices earlier this year, seemed to be on "reasonably firm footing" with inflation remaining under control.

Greenspan's assessment has bolstered the belief that the Fed will boost interest rates for a ninth time when policy-makers meet at the end of this month. The Fed began a campaign of gradual quarter-point rate hikes a year ago in an effort to make sure the economic recovery did not generate unwanted inflation.

Scott Brown, chief economist at investment firm Raymond James, said he was looking for quarter-point hikes at the June and August meetings but then possibly a pause as the Fed examines incoming data.

"The Fed is more fearful of labor cost pressures than commodity price pressures," Brown said, noting that Greenspan linked the recent rise in unit labor costs to a slowdown in productivity.

The 0.6 percent drop last month in wholesale prices, the biggest since a 1.5 percent plunge April 2003, was much bigger than the more modest 0.2 percent decline analysts had been expecting. The government reports on consumer prices on Wednesday, and analysts are predicting a small 0.1 percent rise, compared to a 0.5 percent spurt in April.

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

The 3.5 percent drop in energy costs in May was the biggest decline in this category since a 7.2 percent plunge in April 2003. Gasoline prices fell by 9.9 percent while home heating oil was down 7.8 percent.

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

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

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

Sales at furniture stores posted a 0.4 percent increase while sales at hardware stores rose by 0.5 percent.

On the Net:

Producer Price Index: http://www.bls.gov/ppi

Retail sales: http://www.census.gov/retail

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