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September 14, 2000

Wholesale Prices Unexpectedly Fell in August
By Dow Jones Business News

Survey Timing Off -- Expect September PPI to Soar ... Weiss comments

WASHINGTON - Wholesale prices dropped unexpectedly last month as food and energy prices fell, suggesting inflationary pressures are benign.

The producer price index, fell 0.2% in August, the first decline in four months, the Labor Department reported Thursday. Government officials attributed the drop partly to the timing of the index survey and partly to crop surpluses that depressed food prices. When food and energy components are excluded, the index rose 0.1% for the second straight month.

Economists surveyed by Thomson Global Financial expected a modest rise of 0.2% in both the overall and core figures. In July, the PPI was unchanged, while the core rate rose 0.1%. The government previously estimated an unchanged performance in the July core rate.

So far, pipeline inflationary pressures have diminished. In the 12 months ended in August, the PPI grew just 3.3%, compared with 4.1% in the year through July.

"The best place to look for inflation is in the inflation statistics," Robert McTeer, president of the Federal Reserve Bank of Dallas, said this week, arguing that the Fed shouldn't raise interest rates without clear evidence of inflation. If policymakers wish to be preemptive, he said, they should "look for inflation by looking for inflation in the pipeline -market indicators" such as the producer price index.

The latest numbers should reassure monetary policymakers at the Federal Reserve, who have suggested that the productivity of American workers is rising fast enough to offset the inflationary hazard posed by strong growth and tight labor markets.

But crude oil prices, which soared above $35 per barrel last week for the first time in a decade, could be a threat to the current tame inflation outlook. Though oil price increases had little impact on the August PPI - producer energy prices fell 0.2% - they're expected to be more prominent in September and October.

Two Fed officials warned Tuesday that energy prices could eventually filter through to general inflation. "Oil prices clearly have increased in overall price indices this year and possibly are spilling over into the underlying level every week," said Chicago Fed President Michael Moskow.

His counterpart at the Boston Fed, Cathy Minehan, agreed: "Risks here are certainly on the upside" that oil prices will contribute to an outbreak of inflation, she said.

The market will try to make the most of this news, but the Labor Department admitted that the decrease in producer energy prices was due to convenient timing rather than an actual decrease in prices. What we've got here is the calm before the storm. The Labor Department isn't intentionally trying to cook the books, but this report has given investors a false sense of euphoria. If the survey had been conducted at the end of August, the energy prices would have reflected the surging gas, oil, and electric power prices that continue increasing into this month.

The accelerating price of oil shows no signs of slowing down, either. OPEC's decision last week to increase production by a paltry 800,000 barrels has not made a dent in the cost of crude. That is because OPEC producers had already been producing extra barrels and the increase will only result in a few more barrels a day reaching the U.S. In order for prices to move lower, the consensus is that OPEC needs to increase real production by one million barrels a day. Fat chance! And with inventories near record lows, energy prices will remain high. That means next month's PPI will show a huge jump. Wall Street can celebrate the end of inflation today, but next month they will be whistling a different tune.

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