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June 9, 2000

Surprising Slump in Energy Costs Kept Wholesale Prices in Check Last Month
By The Wall Street Journal

Inflation Still a Factor...Weiss comments

WASHINGTON - A slump in energy costs kept overall producer prices stable in May, but prices accelerated more than expected after excluding volatile energy and food data.

The producer-price index, which measures inflation pressures before they reach the consumer, was unchanged after declining a seasonally adjusted 0.3% in April, the Labor Department said Friday. Outside the volatile food and energy sectors, inflationary pressures intensified, pushing the so-called core PPI up 0.2%, following a 0.1% gain in April.

Though the overall PPI was tamer than expected, the core figure was a surprise. Economists surveyed by Thomson Global Markets had expected the overall PPI to rise by 0.3%, but for core prices to rise just 0.1%.

The news offered little insight about whether the Federal Reserve's efforts to stanch inflation have taken hold. The central bank has raised interest rates six times since last June, including an aggressive half-point increase in May, to slow the economy and keep inflation at bay.

Some recent economic reports -- including those on home sales, manufacturing activity and payrolls -- have offered signs that the economy may be slowing. Against this backdrop, economists have offered mixed opinions on whether Fed policy makers will nudge up rates for a seventh time when they meet June 27 and 28.

The real measure of Fed success is in inflation data, however, such as Friday's report and next week's on consumer prices.

Prices in May were 3.9% higher than a year earlier, affected heavily by an 18.1% advance in energy costs. April prices were also 3.9% higher on a year-over-year basis.

Energy costs, which account for 14% of the PPI, fell a surprising 0.5% in May after posting a 4.1% decline in April. Residential electricity prices declined 0.5% last month after logging a 0.2% gain in April. But gasoline prices rose 1.3% last month, rebounding from an 11.7% drop.

Wholesale food prices also declined in May, falling 0.2% after increasing 1% in April. Wholesale computer prices continued to fall, as well, declining 0.8% after falling 2.4% in April. Tobacco prices were unchanged for a second month in a row, but prescription-drug prices fell 0.3% in May after advancing 0.5% in April.

But car prices rose 0.9%, the biggest gain since September 1999. Prices also rose for health products, light motor trucks and women's apparel.

Friday's report carried cautionary signs further back in the production pipeline. Prices of crude goods, such as the cotton to make a blouse, rose 3.2%, rebounding from a 2.5% decline in April. Prices of intermediate goods, say, the cloth for the shirt, declined 0.1% for the second month in a row.

Though the producer-price index remained unchanged last month, the core rate rose higher than expected - signaling that inflationary pressures have not subsided entirely. Wall Street analysts had been quick to pronounce the death of interest rate hikes, but this latest report does little to support that claim. It confirms what we've been saying all along - one month of data indicating a slowdown in the economy does not necessarily mean that inflation has been contained, and many of the recent economic indicators are notorious for being out of whack when adjusted seasonally. More importantly, this does nothing to convince the Fed that inflationary pressures are easing. At face value, the stock market may see an unchanged producer-price index as good news, but the Fed will dig deeper and find a reason for raising rates.

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