Wholesale prices up in August

September 10, 1994|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

Wholesale prices posted their biggest monthly gain in four years in August, a jump that was bigger than economists expected and big enough to send stock and bond markets into a short-term tailspin.

The Labor Department reported yesterday a surprisingly steep 0.6 percent advance in the producer price index, following a strong increase of 0.5 percent in the previous month.

Leading Maryland economists said the news was bad for August, but said the one-month gain does not change a basically positive inflation picture.

"Producer price numbers have been good for a while now," said Mahlon Straszheim, chairman of the economics department at the University of Maryland at College Park and an adviser to Gov. William Donald Schaefer. "One month does not make a trend."

"It was just a terrible report, following another terrible report for July," said Paul W. Boltz, chief economist at T. Rowe Price Associates Inc., the mutual fund company. But, he added, "the unifying theme is that the economy is doing very well. This is garden-variety prosperity."

Mr. Boltz and Mr. Straszheim said they do not expect the Federal Reserve to change monetary policy soon, or think the Fed should. Mr. Boltz said the market has expected a November rise in rates ever since the most recent increase was announced last month. He thinks that will be enough to keep inflation in check.

"I think the Fed has done all it should do," Mr. Straszheim said. "I think the Fed will undoubtedly sit tight well into the fall.

That view appears to have some support at the Fed itself. In a speech Thursday, Vice Chairman Alan Blinder said he and Chairman Alan Greenspan agree on monetary policy, and that Mr. Blinder believes "there's at least a fighting chance" the Fed has already raised rates enough to achieve a "soft landing," which would slow the economy enough to defuse inflation without cutting off growth.

Presidents of the Federal Reserve Banks in Richmond and San Francisco also have made speeches defending Fed policy this week.

August's gains in the prices that producers charge retailers for goods were broad-based, according to a report yesterday by the Department of Labor. The so-called "core inflation" rate, which excludes volatile food and energy prices, rose 0.4 percent. Key components were a 0.7 percent gain in new car prices as some producers slowed down discounts and incentives and a 1.4 percent jump in tobacco.

Food prices jumped 0.7 percent on the back of extremely strong gains in meat and coffee. Beef prices rose nearly 7 percent, the biggest jump in a decade, while fish rose 4.4 percent. Coffee prices rose 12 percent after a 43 percent climb in July, prompted by a frost in key growing regions of Brazil.

Officials at Giant Food Inc., the state's biggest supermarket chain, and McCormick & Co. Inc., the state's biggest food company, said they couldn't explain the food price gains.

A consensus of economists had expected the producer price index to rise only 0.4 percent in August, with only a 0.3 percent gain in the core inflation index, said Bill Donovan, vice president for fixed income strategy at Alex. Brown & Sons Inc. in Baltimore. Other reports said the consensus prediction for the core rate was only 0.2 percent, half the actual result.

As often happens when Wall Street gets worse-than-expected economic news, stock and bond markets tanked after the 8:30 a.m. announcement. The Dow Jones industrial average fell by more than 40 points in the first half-hour of morning trading before stabilizing to close the day at 3,874.81, down 33.65.

The yield on the benchmark 30-year U.S. treasury bond rose to 7.69 percent from 7.57 percent in heavy trading. The bond traded at a yield as high as 7.71 percent, the highest in two months, before stabilizing. Bond yields rise when the value of the bond falls.

The surge in producer inflation the last two months -- producer prices rose 0.5 percent in July -- follows years of inflation that remained well below late-1980s levels even as the economy began to grow strongly.

Annual inflation ran about 4.5 percent from 1987 through 1989 before climbing to 6.1 percent in 1990. Inflation has been 3 percent or lower annually for more than three years since, the best stretch in three decades.

For the first eight months of this year, the wholesale index climbed at an annual rate of 2.9 percent. Because of wholesale price declines in late 1993, producer prices are only 1.9 percent higher than this time last year.

Mr. Boltz said that recent producer price gains do not pose the risk of the sort of inflation in the late 1970s. One difference, he said, is that President Clinton is promoting a much tighter monetary policy than President Carter did early in his term.

"You have to have aggressively easy, Carter-style monetary policy to get double-digit inflation," Mr. Boltz said. "The best news on inflation is behind us, but that doesn't mean it is going to accelerate to the moon."

Economists and others pointed to several reasons to believe that the last two producer reports may make inflation look worse than it is.

Mr. Straszheim and Labor Secretary Robert B. Reich said the gains are coming without any significant increases in labor costs. If wages, a major component of inflation, do not begin to rise then any price gains could be hard to sustain.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.