ICS Magazine

Wholesale prices plunge; new concerns about deflation

May 15, 2003
WASHINGTON (AP) -- Wholesale prices plunged by a record 1.9 percent in April as the end of the Iraq war removed pressures on energy costs, which posted their largest drop in nearly 17 years. Operating capacity at big industry nosedived to the lowest ebb since 1983.

The big drop in the Producer Price Index, which measures the prices of goods before they reach store shelves, marked an about-face from March when higher energy prices, stoked by the war, helped to catapult wholesale prices up by a hefty 1.5 percent, the Labor Department reported.

Thursday's report makes clear that inflation isn't a problem for the economy, but it might intensify fears about whether the United States is heading down a path of a destabilizing fall in prices.

In other economic news, the Federal Reserve reported that production at U.S. factories, mines and utilities fell by 0.5 percent in April for the second month in a row, a fresh sign that manufacturing is the weakest link in the economy's ability to get back to full economic speed. Economists were forecasting a 0.4 percent decline.

Operating capacity sank to 74.4 in April, the lowest level since June 1983, as big industry throttled back production amid lackluster customer demand. The drop in the PPI in April was more than double the 0.7 percent decline that economists predicted.

Gasoline and home-heating oil prices in April each fell by record amounts, good news for businesses and consumers, who have felt the strain of higher energy prices on their budgets and spent more cautiously in return.

Already worried about sluggish growth, Federal Reserve policy-makers last week raised a new concern -- that the country could face deflation, a prolonged bout of falling prices. Though they indicated the chance of this was remote, it still represented a possible threat to the economy. Fed policy-makers signaled they were prepared to cut rates, now at a 41-year low, to ward off even the threat of deflation.

Economists said those concerns raised the odds that the Fed might reduce rates at its next meeting on June 24-25.

In the PPI report, the 1.9 percent drop registered in wholesale prices surpassed the previous record decline of 1.6 percent set in October 2001.

Much of the weakness in April's wholesale prices reflected lower energy costs. Energy prices dropped by 8.6 percent in April, the biggest decline since July 1986. That marked a turnaround from March, when energy prices, pushed higher on war tensions, rose by 5.7 percent.

In April, retreating energy costs were led by a record drop in gasoline prices, which plunged by 22.3 percent, and a record decline in home-heating oil, which plummeted by 29.3 percent. Costs for liquefied petroleum gas, such as propane, fell 25.9 percent. Residential natural gas prices went down by 3.1 percent.

Food prices, however, rose by 0.9 percent in April, a big pickup from March's tiny 0.1 percent rise.

Excluding food and energy prices, which can swing widely from month to month, "core" wholesale prices fell by 0.9 percent in April. That compared with a 0.7 percent increase in core wholesale prices in March and marked the biggest drop in core prices since August 1993.