020628 Wholesale Prices Fall 0.4 Percent

Washington - Wholesale prices fell by 0.4% in May, the biggest decline in five months, largely reflecting lower costs for gasoline and other energy products. But that didn't motivate consumers: retail sales fell.

The decline in the Producer Price Index, which measures inflation pressures before they reach store shelves, reported by the Labor Department, was a surprise to many analysts. They were forecasting a tiny 0.1% advance in the index.

In another report, sales at the nation's retailers fell 0.9% in May, the biggest drop in six months, the Commerce Department said. Consumers trimmed spending on cars and clothes. Lower gasoline prices also were a big factor in last month's decline.

Retail sales in May were weaker than many analysts expected and followed a strong 1.2% advance in April.

On Wall Street, the retail sales report pulled stocks down. The Dow Jones industrial average was off 103 points and the Nasdaq index was down 22 points in morning trading.

Prices paid to factories, farmers and other producers fell for two months in a row, suggesting that inflation continues to be under control. In April, wholesale prices dipped by 0.2%.

Excluding volatile energy and food prices, the "core" rate of inflation at the wholesale level was flat in May, after having edged up 0.1% the month before.

Given the tame readings, Federal Reserve policy-makers will have leeway to keep short-term interest rates at 40-year lows to help along the economic recovery.

Most economists predict the Fed will leave rates unchanged at its meeting later this month and into the summer.

Federal Reserve Chairman Alan Greenspan and his colleagues have expressed concerns about the vitality of the recovery in the months ahead. Among their concerns: how consumers, whose spending accounts for two-thirds of all economic activity, will hold up; and when businesses will invest in new plants and equipment on a sustained basis, a key ingredient to a full recovery.

Separately, new claims for unemployment insurance rose last week by a smaller-than-expected 6,000 to 390,000, the department reported. Even with the increase, new claims hovered below the 400,000 mark, a level associated with weakness in the jobs market.

Another encouraging sign: the number of laid-off workers continuing to draw unemployment benefits dipped to 3.77 million, for the week ending June 1, the most recent period for which the information is available. Early in May, these so-called continuing claims hit a nearly two-decade high of 3.83 million

The unexpected decline in wholesale prices in May stemmed in large part from a 2.3% drop in energy costs, which had risen sharply the month before. World oil prices recently cooled off as global output increased, fears of supply disruptions receded and demand was sluggish.

Gasoline prices went down 9.6% in May, the biggest decline in six months. Heating oil prices fell 4%, residential natural gas prices declined 0.5% and residential electric power prices edged down 0.1%.

Food prices nudged down 0.2%, after falling by a sharper 3.2% in April. Falling prices for beef and veal, pork, and dairy products outweighed rising prices for chickens, vegetables and fruits.

Costs for light trucks, such as SUVs, declined by 0.9% in May, while car prices rose 0.4%.

For the 12 months ending May, wholesale prices fell 2.7%.

Falling prices can offer some good deals for consumers. But for companies whose product prices are going down, it means more pressure on already pressed profit margins.

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