US Wholesale Prices Take a Decided Drop, Easing Inflation Fears

WALL Street and the bond market can relax: Even though the economy is picking up, there are no signs of incipient inflation.

Instead, the Department of Labor reported yesterday that the Producer Price Index (PPI) actually fell by 0.2 percent in October, following a slight rise in September.

``Thank goodness, we needed that - the bond market was upset thinking the economy was too strong,'' says Donald Ratajczak, an economist at the Georgia State University Economic Forecasting Service. But, he adds, ``It's way too early for signs of inflationary pressure.''

Among the goods that declined in price are automobiles, newspapers and magazines, and natural gas. Tobacco, home electronic equipment, and gasoline and fuel oil rose in price, as did poultry, cooking oils, and confectionary.

The auto segment, however, had the greatest impact on the PPI, which reflects wholesale prices. In figuring car prices, the Labor Department made a technical adjustment to reflect the installation of air bags in 1994 models.

Because this is a year earlier than the mandated period, the government counts the additional cost as a quality improvement, not a price increase. As a result, the automobile segment of the PPI shows a seasonally adjusted decline of 3.9 percent, instead of an increase.

Without the change in the auto segment, Ratajczak says the PPI would have gone up.

This adjustment also will show up in the October CPI, which was reported today. Mr. Ratajczak says the CPI will be up only 0.2 to 0.3 percent. Without the adjustment, he says the CPI would rise 0.4 to 0.5 percent. The CPI numbers will also reflect the rise in the government's excise tax on fuel, which adds 0.2 percent to the inflation index.

The low inflationary numbers should ease any concerns that the Federal Reserve Board will start to raise interest rates when the Fed's Open Market Committee (FOMC) meets next Tuesday. The FOMC sets short-term interest rate goals.

However, Lyle Gramley, a former Federal Reserve Board governor, says he expects the Fed to start tightening interest rates early next year. He compares the Fed's actions to a motorist approaching a tollgate. ``You take your foot off the gas first,'' says Mr. Gramley, now the chief economist for the Mortgage Bankers Association in Washington. The tollgate represents the economy approaching full employment in 1995.

Weak economic activity abroad is one reason why economists are not concerned about inflation. European and Japanese companies, operating their factories at relatively low capacity rates, are eagerly exporting some their output to the United States.

In addition, the high unemployment rate - reported at 6.8 percent last Friday - insures that there are no labor shortages. ``There is so much slack in the labor markets that wages are likely to be stable for some time,'' says Gordon Richards, an economist with the National Association of Manufacturers (NAM), based in Washington.

ASIDE from the price changes to reflect the installation of the air bags, new car prices are up about 5 percent. However, a significant amount of that increase is from imported Japanese cars, whose prices reflect a stronger yen compared with the US dollar. Thus, the prices on the new 1994 Japanese imports are up by 4 to 6 percent at a time when the Big Three are hiking prices by no more than 3 percent.

Even though the Japanese are raising prices, auto analyst Susan Jacobs of Jacobs Automotive in Little Falls, N.J., says she does not expect the Big Three to hike sticker prices until next year. ``Most manufacturers are hesitant to raise prices because consumers are so price sensitive,'' Ms. Jacobs says.

Instead of raising sticker prices, she notes, auto companies are trying to wean consumers off incentives that essentially offer cars at a discount to the sticker price. Thus, consumers may actually pay more for a car but the higher price will not show up in the government statistics.

``Changes in the manufacturers-suggested retail price are not likely to be a good indicator of changes in price the consumer is likely to see,'' Jacobs says.

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