990840 Despite Cheaper Beef, Wholesale Prices RiseAugust 19, 1999Washington - Falling prices for beef, vegetables and fruit partly offset an increase for gasoline to hold wholesale costs in general to a modest 0.2% increase for July, the Labor Department reported Friday. Financial markets were buoyed by the news and ended the week on the rise. Last month's increase in the Producer Price Index, which measures inflation pressures before they reach the consumer, followed a 0.1% drop in wholesale prices in June, the second decline this year. And excluding the volatile energy and food categories, wholesale prices were unchanged in July, after a 0.2% decline in June. Financial markets welcomed the better-than-expected figures. The bond market rallied, pushing the yield down on Treasury's 30-year bonds, and the Dow Jones industrial average closed up 184.26 points at 10,973.65. Nonetheless, many economists held to their belief that the Federal Reserve will raise interest rates for a second time this year on Aug. 24. Their worry: The economy still is growing too strongly, and inflation dangers may be lurking. Friday's report "doesn't eliminate the high probability of a quarter-point interest rate increase for this reason: Because it appears that inflation pressures are building beneath the surface," said Paul Kasriel, chief economist for Northern Trust Co. To that end, Kasriel and other economists pointed to a 0.6% increase in the price of intermediate goods, which include materials used in an early phase of the production process. Mark Zandi, an economist with Regional Financial Associates, agreed that an August rate increase is probable. But he said the financial markets' found comfort in the July wholesale report "because it may reduce the chances that the Fed would have to tighten aggressively later in the year or even early next year." So far this year, wholesale prices have risen at an annual rate of 1.7%, compared to no change for all of 1998. The pickup in this year's wholesale prices comes from big increases in energy costs, which had been falling for much of 1998. For July, energy costs rose 3.4%, led by a hefty 12.7% increase in gasoline prices, an advance that motorists felt at the pumps last month. The July gain in gasoline prices was the largest since a 26% surge in April, which helped push overall wholesale prices up by 0.5% that month, the biggest increase this year. That gain plus an even sharper April rise in consumer prices put the Fed on inflation alert and led to a June 30 increase in a key Fed interest rate, the first hike in two years. Donald Ratajczak, director of Georgia State University's economic forecasting project, attributed the July spike in energy prices, including gasoline, to a variety of factors that include production cuts by members of the Organization of Petroleum Exporting Countries, a pickup in demand from recovering economies in Asia and Latin America and increased energy demands caused by unusually hot weather in many parts of the United States. While gasoline pump prices reached their highest point in more than 18 months in July, a nationwide check of gasoline stations by the Lundberg Survey has shown in the last two weeks a slowing in the rate of increases. July's 3.4% rise in energy costs was offset partially by a 0.9% drop in food prices, the biggest decline since April. Beef prices, which had risen sharply in June, fell 3.4% in July, their biggest drop since February 1997. Lower costs for raising livestock because of cheap grain prices and a mild winter that resulted in fewer dead cattle helped drive beef prices down, Ratajczak said. Vegetable prices also were down a sharp 8.1% in July, led by steep declines in prices of cauliflower, broccoli, tomatoes and green peppers. Fruit prices also were down, declining 3.2% as the price of blueberries, nectarines, melons and peaches all fell. But Ratajczak said a drought that has hit parts of the country is driving up vegetable and fruit prices and that's likely to show up in next month's report. In a separate report, the Commerce Department said the level of inventories held by businesses on shelves and back lots rose 0.3% in June, but sales climbed at an even faster 0.9% pace. That brought the inventory-to-sales ratio to 1.34, meaning it would take 1.34 months to exhaust inventories at the June sales pace. Analysts see the current inventory level as posing no threat that businesses will be forced to cut back production to work off unwanted supplies.
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