Producer prices fell 0.3% in Jan. Flat industry output lessens inflation, interest-rate fears

February 15, 1997|By BLOOMBERG NEWS

WASHINGTON -- Producer prices unexpectedly dropped in January for the first time in more than two years while industrial output stalled -- more evidence America's economy is slowing while inflation remains in check, government figures yesterday showed.

The Labor Department's Producer Price Index, which tracks prices paid to factories, farmers and other producers, declined 0.3 percent last month -- the first decrease since October 1994 -- after rising 0.6 percent in December. The index's core rate, which excludes food and energy costs, was unchanged in January from a month earlier, when the core rate fell 0.1 percent.

Meanwhile, output at U.S. factories, farms and utilities was unchanged in January after rising a revised 0.5 percent in December, restrained in part by weaker production of household appliances, the Federal Reserve said.

"Inflation is still far off stage" even as the economy grows, said Robert Dederick, an economic consultant at the Northern Trust Co. in Chicago.

That's because businesses can't raise prices without running a risk of losing customers. "With Europe and Japan still in recession, manufacturers cannot push through price increases because there's so much excess capacity abroad," said David Wyss, an economist at DRI/McGraw-Hill in Lexington, Mass.

For example, a government commission found in December that Utah-based Geneva Steel Co. and other U.S. steel producers were hurt by cheaper imports from China and Russia.

Investors interpreted the news as a sign that the Fed will have little reason to raise interest rates anytime soon. "Any fears of Fed tightening are unwarranted," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago. "The good news on inflation is not over. Oil prices have declined $4 per barrel in the past five weeks," he said.

The Dow Jones average of 30 industrial stocks, which broke the 7,000 level for the first time Thursday, retreated 33.48 points yesterday to close at 6,988.96.

The bond market rallied with yields on 30-year Treasury bonds dropping to 6.53 percent at the close, the lowest level since Dec. 27 and down from 6.62 percent late Thursday.

Producer energy prices posted their largest decline since June, falling 0.2 percent. Wholesale food prices, meanwhile, which account for about a quarter of the index, fell 1.0 percent, the largest decline since an identical drop in August 1991. And wholesale auto prices fell 0.4 percent.

Prices for raw materials showed the only big increase last month, rising 5.2 percent. That's the largest increase for raw materials prices since the Persian Gulf crisis in October 1990. Prices for semifinished, or intermediate, goods rose 0.2 percent.

For all of last year, producer prices rose 2.8 percent, up from a 2.3 percent increase in 1995. The core rate rose just 0.6 percent last year compared with a 2.6 percent gain in 1995.

With industrial production flat in January, the plant-use rate fell to 83.3 percent from a revised 83.5 percent in December, the Fed said. That's one more sign that heavy industry still has excess muscle to meet demand without raising prices. The Fed revised downward its calculation of factory and utility output in December to 0.5 percent from the previously reported 0.8 percent increase.

Excluding motor vehicles and parts, industrial production fell 0.1 percent in January. Before yesterday's report, analysts expected a 0.2 percent increase in January industrial production and a plant-use rate of 83.4 percent.

Pub Date: 2/15/97

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