Is Deflation On Deck?

Wholesale Prices Dipped 0.3 Percent In May

(CBS/AP)  Wholesale prices dipped by 0.3 percent in May, on the heels of a record drop registered the month before, underscoring Federal Reserve concerns about the possibility of the country facing an economically dangerous price decline.

Last month's decline in the Producer Price Index, which measures prices before they reach consumers, came after wholesale prices plunged by 1.9 percent in April, the biggest monthly drop ever registered, the Labor Department reported Friday.

The 0.3 percent decrease in wholesale prices in May was slightly deeper than the 0.2 percent drop that economists had predicted.

Policymakers insist the risk of sustained deflation is slight. Still, policymakers have signaled that low inflation risks allow them to further adjust already decades-low interest rates.

The Federal Reserve meets June 24-25, and most economists are convinced the central bank will reduce interest rates by another quarter point.

Economists are making that prediction because of concerns that Fed Chairman Alan Greenspan and his colleagues have raised about the possibility of the country facing a destabilizing fall in prices, something economists call deflation, given the largely stagnant state of economic growth.

Most of the May price decline came from a large drop in energy prices. But falling prices also were reported for men's and boy's clothing, heavy motor trucks, and some food products.

In a second report, the U.S. trade deficit declined slightly to $42.03 billion in April, after setting an all-time high in March, as the biggest decline in crude oil prices in 13 years helped to cut America's foreign oil bill, the Commerce Department said.

The economy grew at a tepid 1.9 percent rate in the first quarter of 2003. Merrill Lynch is among those predicting it probably did worse in the current quarter, growing at a scant 1.3 percent pace.

Businesses, still wary about the uneven recovery and waiting for profits to improve, have been reluctant to make big commitments to capital spending and in hiring. That is the major force restraining the economy's ability to shift into a higher gear and stay there.

The PPI measures the prices paid to factories, farmer and other producers. For a producer, falling prices for something he sells means more of a squeeze on profit margins, which are still on the mend from the economic slump. Economists say businesses won't really step up investment and hiring until the profit situation turns around.

Still, for many companies, falling prices for energy means less expensive energy bills and less of a strain on budgets.

Energy prices fell by 2.6 percent in May, on top of a 8.6 percent decline in April. Gasoline prices dropped 11.1 percent last month, home heating oil plunged 14.6 percent and residential electric power declined by 0.4 percent.

Residential natural gas, however, rose 0.8 percent and liquefied petroleum gas, such as propane, increased 6.4 percent in May.

High natural prices are likely to last into next year, and could weaken some key American industries' ability to compete, Greenspan told Congress on Tuesday. He stopped short of suggesting that tight natural gas supplies, which have caused prices to more than double from last year, might thwart the recovery.