Wholesale Prices Still In Check

Inflation on the wholesale level was a no-show again last month as a big drop in food costs helped offset the biggest jump in energy prices since April, the government reported Friday.

The Labor Department said its Producer Price Index, which measures inflation pressures before they reach the consumer, was unchanged in August after having fallen by 0.2 percent in July.

Energy prices did take a big jump, rising by 1 percent in August, reflecting upward pressure on global oil prices as concerns increase over what a possible U.S. war in Iraq could do to world supplies.

However, the rise in energy prices was offset by a 0.4 percent drop in food costs as well as declining prices for new cars and trucks and computers.

Overall, inflation has been well behaved at both the wholesale and retail levels as last year's recession and this year's faltering recovery have kept a lid on prices. Through the first eight months of this year, wholesale prices have risen at an annual rate of just 0.8 percent.

The absence of inflation pressures has been a primary reason that the Federal Reserve has been able to leave interest rates at a 40-year low throughout this year in an effort to boost what so far has been an anemic recovery from the country's first recession in a decade.

In other economic news, the Commerce Department reported that retail sales rose a surprisingly strong 0.8 percent in August. Much of the gain was driven by a big jump in auto sales, reflecting cut-rate financing offers, but even outside of autos sales posted a solid 0.4 percent rise.

The August increase in sales followed an even stronger 1.1 percent climb in July and should help ease concerns that the big plunge in stock prices in June and July, by shaking consumer confidence, was putting the fledgling economic recovery at risk.

The August retail sales numbers signaled that the consumer sector, which drives two-thirds of economic growth, is still thriving even as the rest of the economy struggles.

Retail sales have been bolstered by the Fed's decision to keep interest rates at that four-decade low, which has boosted sales of big-ticket items such as cars and houses.

"Aside from cars, people were buying furniture and home appliances, which is what we are looking for with strong home sales," said David Wyss, chief economist at Standard & Poor's Rating Services in New York.

The figures outpaced the expectations of U.S. economists polled in a Reuters survey. Analysts had forecast a 0.5 percent rise in overall retail sales and a 0.1 percent gain in sales excluding automobiles.

Federal Reserve Chairman Alan Greenspan, testifying before the House Budget Committee, said that the terrorist attacks of a year ago and the recent steep drop in the stock market were continuing to exert "depressing effects" on the economy. But he gave no hint whether the Fed might cut interest rates when policy-makers next meet on Sept. 24.

The retail sales report may reinforce expectations that the Fed will hold interest rates steady at that session.

A nationwide Fed survey prepared for that meeting found that businesses in every region of the country were experiencing "slow and uneven growth" in late July and August. However, most analysts believe that the Fed will not cut rates but instead will be content to leave the overnight bank lending rate at 1.75 percent.

The report on inflation found that outside of the volatile food and energy sectors, inflation was also non-existent last month with the so-called core rate of inflation actually falling by 0.1 percent after having dropped an even larger 0.3 percent in July.

So far this year, this core inflation rate is dropping at an annual rate of 0.5 percent.