Producer Price Index Increases

Journal Record, The (Oklahoma City), Feb 11, 1995

WASHINGTON (AP) _ Inflation at the wholesale level was moderate last month. But the latest government figures provide mixed signals that reflect possible turbulence beneath the calm.

The Labor Department said Friday the Producer Price Index, measuring inflation pressures before they reach the consumer, rose 0.3 percent in January. The closely watched core PPI _ which excludes volatile energy and food costs _ was milder, rising 0.2 percent.

The figures were smaller than the 0.4 percent economists had predicted. But analysts noted that December figures were revised upward and also cautioned that higher prices at earlier stages of production below the wholesale level are worrisome.

Prices for intermediate and crude goods rose 1 percent. Excluding energy and food, raw materials were up 3 percent.

Financial markets were mixed after an initial rally. The Dow Jones industrial average was down about 6 points by early afternoon and bond prices also fell.

Analysts said the Federal Reserve, which has been battling inflation by raising interest rates, likely will remain on the sidelines for now. But by midspring, they said, the Fed may raise short-term rates for the eighth time since last February.

"These statistics clearly keep the Fed on guard," said Marilyn Schaja of Donaldson, Lufkin Jenrette Securities Corp. "The threat of inflation would still exist," she said, even if prices for raw materials and intermediate goods stabilize.

"A few strong economic reports might mean another move up" in interest rates, said Kermit Baker of Cahners Economics in Newton, Mass.

The Federal Reserve has raised a key short-term rate seven times in 12 months _ from 3 percent to 6 percent _ most recently on Feb. 1.

The higher rates are expected to slow the nearly 4-year-old economic expansion.

Susan Phillips, a Federal Reserve board member, hinted in a speech Friday the central bank may not be done boosting rates. "We've seen the longest stretch of relatively low price inflation in a full generation. We have gotten much of the sand out of the gears, but it's not all gone," she said.

A consensus forecast of 52 analysts surveyed by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter, projected Friday that inflation would increase 3.2 percent this year.

Analysts said while wholesale prices have remained remarkably benign during the four-year economic recovery, there are danger signs.

"For the last eight months, crude and intermediate prices have been accelerating," said economist Eugene Sherman of the Wall Street investment firm, M.A. Schapiro Co. "Those are pipeline numbers that tell us one of these days, we'll get a pop. They're becoming a problem."

"There's a degree of ambiguity in the producer price data," said Ron Schreibman of the National Association of Wholesaler Distributors. "Data to be released over the next several weeks will be critical in determining how aggressive the Federal Reserve intends to be in the first half of 1995."

The Labor Department said wholesale energy costs jumped 2.3 percent last month. The biggest increase in five months was led by a 7.9 percent rise in gasoline prices that more than offset a 5.2 percent drop for heating oil.

Food prices fell 0.6 percent as vegetables plunged 26.6 percent. Fruit prices slipped 2.2 percent; beef, pork and poultry were up. Car prices rose just 0.1 percent; tobacco products were unchanged.

The Producer Price Index rose 1.7 percent last year, unchanged from an earlier estimate, even though the gauge was revised upward for December. The government said PPI actually was up 0.4 percent in December, twice the previous estimate.

The Consumer Price Index climbed 2.7 percent in 1994, the fourth straight year of moderate advances. CPI figures for January are due out Wednesday.

There have been scattered signs the economy is slowing from the fourth quarter of 1994, when it grew at a robust annual rate of 4.5 percent. Unemployment rose to 5.7 percent in January, its highest level in three months.