Drug costs contribute to 0.2% rise in index Despite May increase, analysts expect producer prices to remain stable


WASHINGTON -- Prices paid to U.S. producers climbed for the second month in a row in May without changing economists' forecasts for low inflation in 1998. A one-month spurt in prescription drug costs accounted for almost all of the increase.

"There's nothing much to complain about," said Cynthia Latta, an economist at Standard & Poor's DRI in Lexington, Mass. "If you look behind [the drug price increase], what you see is there isn't any upward pressure on prices."

While the producer price index rose 0.2 percent last month, matching April's increase, the index has fallen at an annual rate of 1.6 percent for the first five months of the year, Labor Department figures showed yesterday. Crude oil prices fell to a 10-year low this week, suggesting that producer prices are likely to remain tame in the months ahead.

The record 10.7 percent rise in prescription drug costs last month was due almost entirely to a 600 percent price increase for "minor tranquilizers," Labor Department analysts said.

The Labor Department declined to name the drugs involved, though Mylan Laboratories Inc. of Pittsburgh confirmed it recently raised prices on some of its generic tranquilizers. "We have no immediate plans to increase prices again on those same products," Mylan Labs Vice President Roger Foster said.

The core rate of the PPI, which excludes food and energy costs, also rose 0.2 percent. Without the drug price increase, the PPI would have been unchanged in May and the core rate would have fallen about 0.1 percent, a Labor Department spokesman said.

Business inventories rose in April at the slowest pace in three months as sales declined, Commerce Department figures showed. Inventories increased 0.2 percent for the month, following a 0.6 percent March gain. That was the smallest increase since a 0.1 percent rise in January.

"If April is any indication of what's happening, the pace of inventory accumulation is indeed slowing," said Kathleen Camilli, director of economic research at Tucker Anthony Inc. in New York. That points to slower growth in the second quarter, she said.

The Federal Reserve Bank of Atlanta also said its gauge of manufacturing activity grew at a slower pace in May than April, while the University of Michigan said its index of consumer confidence showed little change in early June from a month ago.

The PPI report showed that auto prices fell 1.7 percent in May, the biggest drop since October 1990. General Motors Corp., Ford Motor Co. and Chrysler Corp. have been reporting strong sales in response to rebates, incentives and discounts averaging $1,500 a vehicle.

In other categories, wholesale energy prices rose 0.8 percent during May, the largest increase since September, as gasoline prices advanced, the Labor Department said. Producer food prices decreased 0.3 percent last month.

Import prices fell 0.1 percent in May -- the seventh straight monthly drop -- after a 0.3 percent decline in April, Labor Department figures showed yesterday.

Businesses in Asia have also stepped up exports to offset weak domestic demand. "The message out of Asia is overcapacity -- supply exceeds demand," according to economist Ed Hyman's ISI Group in New York. "This is slamming global pricing power."

Pub Date: 6/13/98

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