Prices at the wholesale level fell again in June, the government said Wednesday, pushing worries about inflation to the back burner where they can keep simmering. Meanwhile, retail sales barely budged.
The Producer Price Index for finished goods fell 0.1 percent in June, with the crucial core rate dropping 0.2 percent, the Labor Department said. Food prices rose 0.4 percent while energy prices dropped 0.3 percent. The decline in the PPI was largely due to falling car and truck prices.
However, some signs of creeping inflation appeared further back in the production pipeline. Prices of goods at the intermediate stage of production rose 0.4 percent (and 0.5 percent excluding food and energy) and prices of crude goods climbed 1.4 percent (with a smaller 0.5 percent gain in the crude core).
Bonds ignored the favorable signs on the surface that inflation is slow and spending is slowing. Treasury prices fell moderately, putting the yield of the 30-year bond at 5.92 percent.
The drop in the PPI, the first since February's revised 0.5 percent drop, came as a moderate surprise to economists who track the numbers. The average forecast by a panel of economists surveyed by CBS.MarketWatch.com was for a 0.1 percent gain, although many believed the rate would be flat. The consensus was also for a 0.1 percent gain in the core rate, which excludes often-volatile food and energy prices.
Meanwhile, the Commerce Department said retail sales rose 0.1 percent in June and 0.4 percent excluding auto sales. The MarketWatch consensus called for a 0.3 percent gain in the headline number and 0.4 percent excluding autos.
Retail sales for May were revised to 1.2 percent from 1 percent estimated earlier.
Auto sales fell 1 percent after gaining 3.5 percent in May and gas sales (reflecting the lower prices in June) were off 0.4 percent. Sales at general merchandise store rose 0.5 percent.
Despite the weaker headline number, long-term sales trends show "people are continuing to buy cars, trucks, furniture, building supplies, clothing and everything else that moves or doesnÂ't move," said Joel Naroff, president of Naroff Economic Advisers.
"The Fed members will read the report for what it is, a strong one and that should worry them," Naroff said. "But until inflation shows some clear signs of rearing its ugly head, and the drop in the Producer Price Index does not indicate that is happening, the monetary authorities can continue with their go-slow policy."
The PPI is an important gauge of inflation, measuring prices paid at each stage of the production cycle. The more closely watched Consumer Price Index will be released on Thursday. The consensus calls for a 0.1 percent gain in the CPI and 0.2 percent for the core CPI.
The PPI has risen 1.5 percent in the past 12 months and has also risen at a 1.5 percent rate in the first six months of the year. The core rate has fallen at a 0.4 percent rate in the first half of th year. That's extremely benign inflation with no signs of accelerating price pressures, despite the big rise in crude oil prices.
But the Federal Reserve, which again meets on interest rates on Aug. 24, is concerned about what inflation will be in six or nine months, not so much what it is today.
After nearly two years of declining commodity prices, prices of crude goods are rising again as global demand recovers. Crude goods prices rose at a 15.1 percent annual rate in the first half of the year after falling 13.7 percent in the second half of 1998. Prices of crude goods are just 0.4 percent lower than in June 1998 and are likely to be higher year-on-year when July's numbers are reported.
Those higher prices could translate into higher prices for many goods and services as they work their way into the economy.
For the June PPI, prices of capital equipment dropped 0.3 percent after rising 0.2 percent in May. Light truck prices fell 0.7 percent, communications equipment prices sank 0.9 percent and computer prices dropped 1.4 percent.
Prices of consumer goods excluding foods fell 0.2 percent in June. Car prices plunged 1.3 percent and gas prices dropped 1.9 percent. Apparel prices were lower.
Written by Rex Nutting, CBS MarketWatch Washington bureau chief