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010838 Wholesale Prices Plunge 0.9%

August 11, 2001

Washington - A sharp drop in the costs of gasoline and other energy products helped drive down wholesale prices in July by the largest amount in eight years.

With inflation low, Federal Reserve policy-makers will have more leeway to continue reducing interest rates in their effort to avert a recession when they meet on Aug. 21, economists said.

The 0.9% plunge in July's wholesale prices, reported Friday by the Labor Department, came after a Fed survey of business conditions around the country that suggested the economy had stalled in June and July.

Against the backdrop of that gloomy report and the inflation news, some economists said they were not ruling out a half-point cut in interest rates in August, although many believe the Fed will opt for a more conservative quarter point cut.

“The Fed has a free hand to do what is necessary to overcome the sluggishness in the economy ... a 50 basis-point cut would not be unreasonable,” said economist Joel Naroff, president of Naroff Economic Advisors.

On Wall Street, the inflation report helped to lift blue-chip stocks. The Dow Jones industrial average, after struggling earlier in the session, managed to gain 118 points to close at 10,416.

The bigger-than-expected slide in last month's Producer Price Index, which measures price pressures before they reach store shelves, followed a 0.4% decrease in June, and marked the largest decline in wholesale prices since August 1993.

“The collapse in energy prices is good news for consumers and for producers and gives the Fed a lot of elbow room to keep lowering interest rates as needed,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

One of the reasons the Fed has been able to cut interest rates six times this year, by a total of 2.75%age points, is because inflation hasn't posed a risk to the economy.

Economists believe inflation will remain contained in the months ahead. Soaring energy prices, which caused wholesale prices to spike by 1.1% in January, have eased in the face of eroding global demand. And the yearlong economic slowdown has made it harder for companies to raise their prices and has made many of them reluctant to grant workers' big increases in pay and benefits.

For the first seven months of this year, wholesale prices rose at an annual rate of just 0.5%, a big improvement over the 3.8% increase for the same period a year ago.

“The back of inflation has been broken,” declared Ken Mayland, president of ClearView Economics.

Excluding volatile energy and food prices, the “core” rate of inflation edged up 0.2% in July, following a tiny 0.1% gain. So far this year, core inflation has been rising at an annual rate of 1.7%, a bit faster than the 1.2% rate for the same period last year.

In July, all energy prices fell by 5.8%, the biggest drop since August 1989. That followed a 2.5% decline in June.

Gasoline prices last month posted a 17.7% decrease, the biggest drop in 15 years. Prices at the pump have tumbled since peaking on May 18 at $1.76 a gallon as refiners rushed to fill shortages that developed during the spring.

Prices for liquefied petroleum gas, such as propane, also fell sharply, dropping 17.8%. Home heating oil costs declined by 9.1% and residential natural gas prices declined by 4%.

But prices for residential electric power jumped 2.2%, the biggest increase since January 1991. The increase comes as residents of California cope with a power crisis caused by a shortage of electrical generating capacity.

After ticking up in June by 0.1%, food prices declined by 0.6% in July, the biggest drop in two years. Falling prices for beef, chicken, dairy products, vegetables and fruits swamped sharply higher prices for pork.

Elsewhere, prices for cars fell by 0.3%, while the cost of light trucks, such as sport utility vehicles, jumped 2.3%, the biggest increase since 1987.


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