Inflation Gases Up And Goes

After dropping for two months in a row, wholesale prices went up by 0.5 percent in June, largely reflecting sharply higher costs for gasoline and other energy products.

The increase in the Labor Department's report Friday on the Producer Price Index, which measures prices before they reach consumers, came after wholesale costs plunged by a record 1.9 percent in April and dipped by 0.3 percent in May. It marked the largest increase in wholesale prices since March.

In another report, America's trade deficit, on track to set an all-time high this year, edged up slightly to $41.84 billion in May as imports of foreign cars, televisions and business equipment all showed big gains, the Commerce Department said. It was the second highest level in the past two years, reports CBS MarketWatch.

Foreign producers sold more autos and capital goods, while sales of imported industrial materials dropped as the price of crude oil sank.

The increased auto trade was due almost entirely to heavier flows both ways across the Mexican and Canadian borders, the MarketWatch report said.

The rise in the PPI in June was larger than the 0.3 percent advance economists were predicting. Higher energy prices could put a strain on the budgets of businesses and consumers and could make them more cautious spenders, something that would slow the economy's recovery.

However, excluding energy and food prices, which tend to swing from month to month, "core" wholesale prices edged down by 0.1 percent in June, after inching up by that amount in May. Economists were predicting core prices to rise last month.

Given that prices for other products are retreating, Friday's report probably won't erase the Federal Reserve's worries that the country could be headed for deflation, an economically dangerous long-term slide in prices.

To help the economy, the Federal Reserve on June 25 reduced a key interest rate by one-quarter point to 1 percent, a 45-year low. The rate cut was aimed at bolstering economic growth and thus helping to prevent an outbreak of deflation.

Although Fed policy-makers say the chance of deflation is remote, the central bank still must be alert because of deflation's potential to wreck the economy, economists said.

The United States' last serious deflation occurred during the Great Depression. A bad case of deflation can lead not only to widespread price declines — from goods and services to real-estate and stocks — but also to job losses and pay cuts.

The 0.1 percent drop in core wholesale prices in June marked the first decline since a 0.9 percent drop in April. The decline in core prices last month reflected falling prices for cars, light trucks and communications equipment.

But those and other price declines were swamped by a 3.4 percent increase in energy prices in June, which fell sharply in the previous two months.

In June, gasoline prices jumped by 7.6 percent, the largest increase since February. Home heating oil soared by 9 percent. Residential natural gas rose 3.6 percent and liquefied petroleum gas, such as propane, jumped 6.6 percent.

Energy prices are rising in part on fears that the oil-producing nations might cut production levels for crude oil. But for natural gas, shortages are the problem, something that is worrisome to Fed Chairman Alan Greenspan, who doesn't see much relief in sight.

Meanwhile, prices for food rose by 0.4 percent in June, compared with a 0.1 percent advance in May. In June, higher prices for beef, veal and pork outweighed lower prices for dairy products, vegetables and fruit.