010631 Wholesale Prices Barely Budge in May

Washington - Wholesale prices barely budged in May, restrained by a drop in costs for food and automobiles. The good news on inflation gives the Federal Reserve room to cut interest rates later this month to jolt economic growth, analysts predicted.

The Producer Price Index, which measures inflation pressures before they reach store shelves, crept up a seasonally adjusted 0.1% in May, an improvement over a still-moderate 0.3% increase in April, the Labor Department reported Thursday. It also marked a better reading on inflation than many analysts expected.

“We're seeing an unwinding of price pressures as one would expect in a prolonged period of sluggish economic growth,” said economist Ken Mayland, president of ClearView Economics. “That means there's no major impediment to the Fed lowering interest rates yet again.”

With inflation well contained, the Federal Reserve has been able to act aggressively to stave off recession, slashing interest rates five times this year and driving down borrowing costs to the lowest point in seven years.

Economists predict Fed Chairman Alan Greenspan and his colleagues will cut rates a sixth time at their next meeting June 26-27, by either a quarter or a half percentage point. Some believe that could be the last reduction in the Fed's latest credit-easing campaign.

The news failed to cheer investors. The Dow Jones industrial average closed down 181 points at 10,690, a loss of 1.7%. During the session it was down as much as 212 points. Word of a troubled merger between Honeywell and General Electric helped send stocks tumbling.

The economy has been stuck in low gear since the second half of last year. Still, analysts are hopeful the country will skirt a recession as the impact of the Fed's rate cuts, which take six to nine months to work their way through the economy, begin to take hold and people start to spend all or part of their tax- cut refunds.

The “core” rate of wholesale inflation, which excludes volatile energy and food prices, edged up for the second month in a row by a tame 0.2%, matching many analysts' expectations.

Two other government reports provided fresh evidence of the slumping economy.

Although new claims for state unemployment insurance fell by 12,000 last week to 428,000, the more stable four-week moving average of claims rose to a nearly nine-year high of 424,500, the Labor Department said. The advance in the moving average, which smoothes out weekly fluctuations and is considered a good barometer of the labor market's health, suggested companies are continuing to lay off workers.

Another report from the Commerce Department showed that businesses inventories of unsold goods were flat in April, while sales fell by 0.5%, additional evidence that businesses are struggling to cope with flagging demand.

On a brighter note, the National Association of Manufacturers said that the darkest days of the recession that has hit manufacturing and cost a half million jobs this year may be over.

NAM President Jerry Jasinowski said his organization's latest economic outlook predicted the overall economy, which grew at an annual rate of just 1.3% in the first three months of this year, could rebound to 3% growth by the fourth quarter.

“American manufacturing is bottoming out and is poised for a modest recovery in the last quarter of this year as the inventory hangover is worked off and the cumulative effects of the tax cut and interest rate reductions begin to boost consumer spending,” he said.

In the PPI report, food prices fell by 0.4% in May, after a 0.6% rise the month before. Lower prices for eggs, fish, pork and beef swamped higher prices for fruits and vegetables and a record increase for dairy products.

Prices for cars edged down by 0.1% and light-truck costs declined by 1.6%, the largest drop since February.

Energy prices, however, continued to rise. They went up 0.2% in May, after a 0.1% gain.

Heating-oil costs jumped 8%, the largest increase since September. Residential electric power rose 0.7%, gasoline prices were up 0.4% and residential natural gas prices rose 0.2%.

Cigarette prices, which have been rising as companies increase costs to cover legal expenses, jumped 5.6%, the largest gain since January.

While economists are keeping their eye on inflation creep, many believe that higher prices for energy and other items are more likely to take a bite out of companies' profits than be passed along to consumers in the form of higher prices -- a difficult undertaking when the economy is weak.

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