990618 May Wholesale Prices Up Modestly

Washington - U.S. wholesale prices rose modestly in May, the government said, settling back from a spike in April when an energy price surge sparked fears of inflation.

The Labor Department said the Producer Price Index (PPI) that measures prices paid to the nation's factories, farms and refineries, rose 0.2% last month after a 0.5% gain in April.

Stripping out volatile food and energy costs, the core PPI was up only 0.1% in each of April and May. In the first five months of this year, the so-called “core” PPI has barely budged -- down 0.2% in January, up 0.1% in February and flat in March before slim back-to-back 0.1% rises in April and May.

The May numbers were in line with Wall Street economists' expectations. They had anticipated most price increases for finished energy products stemming from an agreement in March among oil exporting countries to curb production.

“For today, the PPI is in line with expectations and a non-event,” economist Clyde Kendzierski of Sanwa Bank said.

The government is scheduled to issue its more intensely watched Consumer Price Index -- seen as a better measure of inflation trends for ordinary Americans -- next Wednesday.

Analysts expect Federal Reserve policymakers who next meet to consider interest-rate strategy on June 29-30, will weigh May's CPI performance heavily in deciding whether or not to nudge borrowing costs up to keep price pressures in check.

Bond prices fell after the May wholesale prices report was issued along with a stronger-than-expected report on May retail sales from the Commerce Department. Prices later recovered to trade slightly below their level from the time before the two reports were published.

The energy component of the monthly PPI was unchanged in May following a 5.1% jump in April. After shooting up a record 29.1% in April, gasoline prices fell 2.7% last month.

Food costs rose last month, though, with the wholesale gauge's food component climbing 0.5% following a 0.9% April drop. The department said pork prices increased 8.3% in May while fresh fruit prices were up 12% from April.

Despite the favorable performance of overall producer prices last month, there were hints of potential problems down the road.

The crude goods component of the index climbed 5.5% in May -- the biggest monthly pickup in around 2-1/2 years since a 6.1% increase in December 1996 -- as prices for crude oil, natural gas and crude petroleum all jumped. Crude goods prices were up only 1.3% in April.

Economist Greg Jones of Briefing.Com in Jackson Hole, Wyo., said there were a few warning-signals for the future in the report that were likely to keep financial markets in some apprehension about the Fed's intentions.

“We saw capital equipment prices rise above trends and we saw pressures in the intermediate and core crude prices,” Jones noted. “That's not going to help the market with its inflation fears.”

Jones added: “I still think (any Fed rate hike) still comes down to CPI.”

Thursday, Federal Reserve Governor Roger Ferguson said in a speech that the Fed was closely monitoring increases in prices for oil and services like health care.

Ferguson noted the policy-setting Federal Open Market Committee adopted a bias on May 18 toward higher interest rates and said that “made it clear that we are watching things very closely and stand prepared to act promptly if the evidence begins to mount that inflationary pressures could be building.”

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