WASHINGTON -- A key measure of U.S. inflation retreated for the fourth consecutive month in April while business sales cooled, the government said yesterday.
The report buoyed Wall Street as investors viewed the numbers as suggesting that the Federal Reserve might refrain from raising interest rates next week.
"I don't think we've seen anything quite comparable to what we're going through now," said former Federal Reserve Gov. Lyle Gramley, an economist at the Mortgage Bankers Association of America.
"We do not have inflation," said Leonard Katz, who helps manage $300 million in bonds at Fixed Income Management Group in Garden City, New York. "This is wonderful -- absolutely."
The Labor Department's producer price index fell 0.6 percent in April -- the largest drop since August 1993. For the first four months of the year, producer prices have fallen at a 4.0 percent annual rate. Moreover, the less volatile core rate of the PPI, which excludes food and energy costs, dropped 0.1 percent last month.
Commerce Department figures, meantime, showed business sales fell 0.3 percent in March while inventories continued to pile up at shopping centers and warehouses, a sign that factory orders could slow in the months ahead.
In the face of other evidence that the economy continues on a strong growth path, economists said, yesterday's reports suggest that the Federal Open Market Committee, the Fed's policy arm, will have trouble justifying another increase in the overnight bank lending rate at its policy meeting Tuesday.
The benchmark 30-year U.S. Treasury bond rose a half point, pushing down the yield 4 basis points to 6.88 percent. Stocks also advanced.
The Dow Jones industrial average, up more than 60 points early in the day, ended the session nearly 12 points high, to close at 7,286.16. The dollar was mixed against other currencies.
In March, Fed policy-makers raised the overnight rate a quarter point to 5.50 percent to forestall inflation. Analysts are divided over whether another increase is coming next week.
The last time the economy grew as rapidly with subdued inflation was during the expansion of the early 1960s, former Fed Gov. Gramley said. Then, however, unemployment was higher. When unemployment started falling in the mid-1960s, prices started to accelerate, he said.
Yesterday's inflation report shows that "after more than six years of economic expansion, inflation remains completely absent," said Bruce Steinberg, chief economist at Merrill Lynch in New York. "Indeed, there is deflation at the wholesale level," he said.
That will make it "more politically difficult for the Fed" to raise interest rates again soon, said Kathleen Camilli, an economist at Tucker Anthony Inc. in New York. "It remains to be seen how
much they're going to be pressured by politics."
Though prices are contained, vibrant economic growth and low unemployment have kept the Fed Chairman Alan Greenspan and his central bank colleagues on alert to raise interest rates to guard against inflation.
"The Fed keeps telling us they look at growth -- not today's inflation," said Ian Shepherdson, chief economist at HSBC Markets Inc., in New York. The Fed "wants the insurance" against inflation, the Fixed Income Group's Katz said.
Signs that the economy may be cooling were evident in the Commerce Department's report that business inventories advanced in March by 0.3 percent. Sluggish sales caused unsold goods to pile up at factories, warehouses and retailers.
That could boost previous calculations that the economy grew at a torrid 5.6 percent annual rate in the first three months of the year. That was based on an estimate that inventories fell in March. It also points to slower growth in months ahead because it means that businesses will draw on existing stocks, instead of sending orders to their suppliers to satisfy a rebound in demand.
"Inventory building will not provide the boost to economic activity that we saw in the first quarter, when stock accumulation accounted for about a third of the overall [growth] gain," said Lynn Reaser, chief economist at Barnett Banks in Jacksonville, Fla.
Moreover, retail sales, a key gauge of economic growth because consumer spending makes up two-thirds of the economy, fell last month for the first time since November, according to government statistics released yesterday.
April's producer price index decline marks the largest decrease since a 0.8 percent drop in August 1993, the government said. The last time the PPI fell for four straight months was between May and August 1993. In March, the PPI declined 0.1 percent while the core rate rose 0.4 percent.
For the first four months of 1997, producer prices have fallen at an annual rate of 4.0, down from a 2.3 percent increase for the first four months of 1996. The core rate has shown no change for the first four months of this year, compared with a 0.2 percent gain in the first four months of 1996.
Pub Date: 5/15/97