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Producer Prices Slide as Sales Rise, U.S. Reports

Economy: PPI drops 0.3% in March, fifth monthly decline. Retailers show unexpected strength.

April 10, 1998| From Bloomberg News

Prices paid to U.S. producers fell in the first quarter at the fastest pace in almost five years, the government said Thursday, and retailers reported brisk sales in March, signs that inflation is still in check as growth remains strong.

The producer price index dropped 0.3% in March, the fifth consecutive monthly decline, Labor Department figures showed. During the first quarter, the PPI fell at a 4.2% annual rate. That's the biggest quarterly drop since the three months ending in August 1993.

March sales at U.S. retail stores open at least a year largely exceeded expectations as unusually warm weather spurred consumers to buy spring merchandise.

The good news on prices offset concerns that too-fast growth might lead to resurgent inflation. "No matter what your worries are about growth, about what's going on in the stock market, about Asia, this is all reason to relax," said James Glassman, senior U.S. economist at Chase Securities in New York. "The Fed's got economic policy right."

A drop in claims for first-time unemployment benefits offered further support for the view that labor markets remain tight.

Initial claims fell by 2,000 last week to 308,000, while the four-week moving average--a less volatile gauge of changes in the weekly report--rose a bit to 310,750 from 308,500. The numbers surprised analysts.

"We think it might be related to the late Easter, with more hirings late in the month," said Rick MacDonald, an economist at Standard & Poor's MMS in Belmont, Calif. "It could also just be a testament to how strong the job market is."

Federal Reserve policymakers are watching labor markets closely because they now believe Asia's financial problems will be less of a drag on the economy than first thought, Fed Gov. Susan Phillips said in an interview with Market News Service.

The drop in wholesale prices was nearly universal last month. Prices for finished goods fell 0.3%, while intermediate goods dropped 0.5% and prices for crude goods were down 1.6%.

The core rate of the producer price index, which excludes food and energy costs, was unchanged in March after rising 0.1% in February.

Some categories that showed increases in February reversed course in March. Food prices fell 0.4% after rising 0.4% a month earlier. Tobacco prices were unchanged after registering a 1.8% increase.

If anything, some analysts said, it shows that Fed officials still have reason to consider cutting interest rates. "Deflation is creeping up on us, and the Fed needs to be aware of that," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago.

Energy prices led the decline in the PPI, falling 1.9% in March. That should change in the months ahead, analysts said.

Oil prices firmed in late March after oil-producing countries agreed to cut production, though the move came too late to show up in the PPI survey, taken in the first 10 days of the month. In addition, "March turned very cold and people turned their heat back on," said Diane Swonk, deputy chief economist at First Chicago, NBD.

Auto prices at the wholesale level rose 0.1%. Prices for capital equipment, including computers, were unchanged in March, after a 0.1% increase a month earlier.

Clothing stores helped pace the gains at U.S. retailers. Limited Inc.'s sales rose 4%, while analysts expected sales to drop 3% to 5%. Sales at JC Penney Co. rose 1.7%, better than expectations of flat sales.

The record-setting pace of home purchases so far this year has boosted sales of furniture and other household products. Pier 1 Imports Inc.'s same-store sales rose 10.8%. Sales at Sears, Roebuck & Co. rose 4.7%, while Wal-Mart Stores Inc. sales rose 6.2%.

Same-store sales, or sales at stores open at least a year, are considered the best sales indicator because they exclude sales from new, remodeled or closed stores.


Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

March: 130

Source: Bureau of Labor Statistics

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