000752 Energy Leads Wholesale Prices Up 0.6% in June

Washington - Surging gasoline prices and a record jump in the cost of natural gas used in homes pushed wholesale inflation up sharply in June. But that didn't trouble economists and Wall Street investors because most other prices were well-behaved.

After being flat in May, the Producer Price Index, which measures inflation pressures before they reach consumers, shot up 0.6% last month, the biggest increase since March, the Labor Department said.

Analysts didn't find the big advance worrisome -- for now, anyway -- because the rise in inflation was largely limited to the expected leap in energy prices, which analysts believe will ease in coming months.

“There's no reason to be sounding the alarm,” said Richard Yamarone, an economist with Argus Research Corp.

That's because the “core” rate of inflation, which doesn't include energy or food costs, fell an unexpected 0.1%, suggesting that most other prices were in check.

The decline in core prices was the best showing since January and was a more friendly reading on underlying inflation than the 0.1% increase many analysts were anticipating. In May, the core prices rose a modest 0.2%.

On Wall Street, stocks were lifted by the good news on core inflation. The Dow Jones industrial average rose 23.34 points to close at 10,812.05.

Still, some economists wondered to what extent soaring energy costs will show up in prices for other goods.

“The concern I have is whether these higher energy costs will cascade through the economy raising prices of everything from garbage can liners to plastic toys,” said Wells Fargo's chief economist Sung Won Sohn. In some parts of the country, he said, taxi drivers, garbage collectors and airlines have imposed gasoline surcharges.

In a second report, retail sales nationwide rose a brisk 0.5% in June boosted by purchases of cars and gasoline. Car sales rose 1.5% and gasoline sales grew 1.3%, reflecting higher prices at the pump.

“There was still some life in consumer spending -- in contrast to the `tapped out' view that had gained credence recently,” said First Union's chief economist David Orr.

However, consumers did trim purchases of clothes, furniture, building supplies and drugstore-type items last month. Excluding both the volatile cars and gasoline categories, retail sales rose just 0.1% last month, analysts said.

Private economists estimated that overall retail sales moderated in the second quarter from the previous quarter, consistent with other reports suggesting a slowdown in economic growth.

In a third report, industrial production at the nation's factories, mines and utilities rose an expected 0.2% in June, the slowest pace since September.

Many economists believe the Federal Reserve's six rate increases over the last year are working to slow economic growth and keep inflation under control. Given that, some analysts said the odds are good that the central bank will leave interest rates unchanged when it meets next on Aug. 22.

So far this year, wholesale prices have been rising at an annual rate of 4.8%, compared with a 3% gain for all of 1999. The pickup in this year's wholesale prices largely reflects rising energy costs.

After falling in May, energy prices rose a sharp 5.1% last month, the biggest increase since March.

Gasoline prices soared 11.8%, also the largest rise since March. The surge in gasoline prices reflects a number of factors including refinery capacity problems, tight inventories, higher crude oil prices and new environmental regulations.

Residential natural gas costs shot up a record 5.7%, surpassing the previous record gain set in January 1997. Economists blamed that on supply shortages. Prices for liquefied petroleum gas, such as propane, went up 17% and home heating oil prices rose 8.4%.

Higher energy prices swamped lower prices for food, which fell 0.3% in June, the second monthly decline and the best performance since October. Falling prices for fish, fruits and vegetables offset rising prices for eggs, beef and pork.

Elsewhere in the PPI report, car prices fell 0.5%, the biggest drop since February. Cigarette prices posted their biggest decline since the beginning of the year, falling 1.8%. Paper products prices went down 1.3%, the best showing since August.

RETURN TO HOME PAGE

E-mail: sflanagan@sprintmail.com