Producer Price Index Falls for a 5th Month

WASHINGTON — The longest string of wholesale price declines in nearly 45 years provided more fuel for the record-breaking stock market on Friday, reassuring investors that more interest rate increases won’t be needed to control inflation.

The Labor Department said Friday that its producer price index for finished goods fell 0.3% in May, marking the first five-month-long series of drops since the August-December period of 1952. Many analysts had expected a small advance.

“It’s a great country!” exclaimed Edward Yardeni, chief economist at Deutsche Morgan Grenfell in New York, as analysts struggled to describe the latest stream of good economic news.

Federal Reserve Board policymakers are scheduled to meet on July 1 and 2 to consider rates. Most analysts said Friday that they expect the economic news pointing to a slowdown in the second quarter to persuade the Fed to hold rates steady.

“The economy seems to be engineering its own soft landing,” said economist Bill Cheney of John Hancock Financial Services in Boston, referring to the situation in which growth slows, but not so much as to cause a recession. “I can’t see why the Fed will need to move any time soon.”

After growing at a brisk annualized 5.8% rate of the first quarter, the economy has shown several signs of slowing. Retail sales fell for a third straight month in May, the government reported on Thursday.

The strong first-quarter growth fanned inflation worries and led the Fed to boost short-term rates in March, for the first time in more than two years.

The news on producer prices helped push the Dow Jones industrial average up 70.57 points to a sixth straight record high close, 7,782.04. The bond market also reacted favorably, with investors pushing yields down to 6.72% from 6.77% on Thursday.

In a separate report, the Commerce Department said both business inventories and sales rose 0.3% in April. The stockpile gain is the fifth consecutive one, and analysts said the decline in retail sales last month suggests inventories moved higher in May as well.

The decline in producer prices means costs at the wholesale level for the year so far are down by a 3.9% annual rate. The index measures prices for goods just before they reach the consumer level.

Analysts expect a barely perceptible increase in consumer prices when the report for May is released Tuesday.

The PPI drop was led by a 2.1% decrease in energy prices, also the fifth in a row. Food costs, on the other hand, were up 0.4%. Excluding those often-volatile components, the so-called core PPI fell 0.3%, the sharpest decline since October 1994, because of lower costs for goods ranging from cars to computers to toys.

Among energy components, gasoline prices dropped 2.1% and the cost of natural gas for residential use fell 1.3%, offsetting a 2.2% increase in heating oil.

In the food index, coffee was up 5.8%. Beef, pork and fish also rose, but poultry declined. Fresh fruit shot up 7.9%, which includes a 70.5% increase for lemons and a 27.9% jump for strawberries. Vegetable prices rose just 0.1%. Big increases for green peppers, radishes and tomatoes offset declines for squash, lettuce and snap beans.

The report also suggests there is little inflation pressure in the pipeline. Prices for goods at the intermediate stage of processing dipped 0.2% after falling 0.3% a month earlier.

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Producer Prices

Index of finished goods prices; 1982 - 100; seasonally adjusted.

May: 131.2