020527 April Wholesale Prices Tumble on Food

Washington - Prices paid to U.S. producers took a surprise tumble in April as plummeting food costs swamped the impact of rising energy prices, the government said in a report implying inflation would be slow to stir as the economy recovers.

The Producer Price Index, a closely watched wholesale inflation gauge, fell 0.2 percent last month after a 1.0 percent surge in March, the Labor Department said.

A 3.2 percent drop in food costs, where widespread decreases were led by a record plunge in vegetable prices, handily offset the impact of a 2.5 percent rise in energy prices and led to the first decline in the PPI since December.

Stripping out volatile food and energy prices, the so-called core PPI rose a scant 0.1 percent, matching the gain posted in March. Economists had expected the PPI to rise 0.4 percent and the core rate to increase 0.2 percent.

Economists said the report underscored the lack of an imminent inflation threat and would encourage the Federal Reserve to hold for some time before beginning to reverse some of the 11 interest rate cuts it made last year.

"This is a very favorable report," said Richard DeKaser, chief economist at National City Corp. in Cleveland. "In the context of what we've seen in the recent past, the Fed is right to say that inflation has been quiescent. It gives them more latitude to forestall an inevitable rate hike."

While the April figures were surprisingly weak, markets showed little reaction, with investors in U.S. Treasuries keeping an eye on a stock market worried about high levels of corporate debt. In early afternoon trade, the Dow Jones industrial average was off 57 points to 9979, while the tech-heavy Nasdaq composite was down 39 points at 1611.36.

BOTTOM FISHING

Over the 12 months ended in April, U.S. producer prices fell 2.0 percent -- in no small part due to a plunge in energy costs following the Sept. 11 attacks.

Still, many economists expect prices to firm somewhat as the economy recovers. While the cost of finished goods from producers fell in April, further back in the production pipeline there were signs price pressures may be stirring.

Intermediate goods prices rose 0.9 percent on the back of higher energy costs, and the core intermediate index was up 0.2 percent. At the crude goods level, prices rose 5.5 percent, in part due to rising energy prices. But even excluding food and energy costs, crude goods prices shot up 3.6 percent, their biggest rise since a 4.6 percent increase in June 1979.

"The dramatic deflation on the goods side of the economy is abating a bit," said Mark Zandi, chief economist at Economy.com in West Chester, Pennsylvania.

While economists say those prices bear watching, a sharp 8.6 percent rise in first-quarter U.S. business productivity -- or output per hour -- should help keep any bubbling price pressures from spilling into consumer prices.

With retail prices under wraps, Fed policymakers decided to hold interest rates steady when they met on Tuesday, saying the outlook for growth in consumer and business demand was uncertain.

U.S. gross domestic product jumped at an annual rate of 5.8 percent in the first quarter of 2002, but that rise was largely because companies did not cut inventories as sharply as they had in the fourth quarter.

The department is scheduled to release the Consumer Price Index for April on Wednesday. Economists look for a rise of 0.4 percent overall and 0.2 percent excluding food and energy.

LET THEM EAT ... LETTUCE?

After rising for four straight months on poor growing weather, prices paid for vegetables at the farm gate reversed course decisively in April, dropping 46.5 percent. Lettuce prices fell 86.9 percent, cauliflower was off 71.6 percent and sweet corn was down 58.2 percent.

The report also showed a decline in prices for meat, which some economists said have been dampened by a Russian ban on U.S. poultry products and reduced demand in the wake of the Sept. 11 attacks.

The 2.5 percent increase in energy costs built on a 5.5 percent gain in March. Residential natural gas prices rose 3.0 percent in April and gasoline was up 4.2 percent.

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