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Wholesale prices fall, easing inflation concern


ATLANTA - Inflationary pressures eased in May as wholesale prices took the biggest dip in more than two years, the government reported yesterday. The Producer Price Index fell by a surprising 0.6 percent.

In a separate report, the government said retail sales also declined by a bigger-than-expected 0.5 percent, although economists who noted lower gasoline costs said they did not see it as a sign of impending consumer weakness.

In both cases, economists had forecast smaller declines.

Neither report had much impact on Wall Street, where blue chip stocks were held aloft by a jump in the shares of auto companies, including General Motors Corp., and a slight decline in the price of crude oil to $55 per barrel. Technology stocks were flat.

Georgia State University economist Rajeev Dhawan said the PPI's three-month average shows that "price increases are moderating on the producer side." He said this trend plays into the hands of those who believe it will influence Federal Reserve policy.

"The favorable inflation outlook is more ammunition for people who think the Fed will stop [raising interest rates] soon," said Dhawan, director of the GSU Economic Forecasting Center.

The Fed has raised its short-term federal funds rate eight times since June 2004 and is widely expected to increase the rate another quarter-point, to 3.25 percent, at its June 30 policy meeting.

Mark Vitner, senior economist with Wachovia Securities, had a slightly different view.

"With inflation cooling off, the Federal Reserve will be able to hold interest rates steady at a meeting or two later this year, if they feel such a move is necessary," he said. "Longer term, we expect the Fed to continue to nudge the federal funds rate back up to a neutral level, which we currently believe is somewhere between 4.5 percent and 5.5 percent."

The Labor Department said the drop in energy prices accounted for about three-quarters of the PPI decline in May. The overall 0.6 percent drop was the biggest monthly decline for the index since it fell 1.5 percent in April 2003. Economists were expecting a PPI decline of 0.2 percent after April's 0.6 percent advance.

The core PPI, which excludes food and energy costs, rose 0.1, percent compared with a 0.3 percent advance in April and analysts' forecasts of a 0.2 percent increase in May.

Meanwhile, the May Consumer Price Index - scheduled to be released today - is expected to be unchanged overall, but with a 0.2 percent increase in the core rate. The CPI measures retail prices.

The May decline in gasoline prices was also a big factor in the drop in retail sales, with slower auto sales another major factor.

Overall sales fell 0.5 percent compared with an upwardly revised increase of 1.5 percent in April. Economists were looking for a drop of 0.2 percent last month.

Minus automobiles, retail sales fell 0.2 percent compared with the upwardly revised 1.4 percent in April and a 0.2 percent increase analysts had anticipated.

Furniture, building materials, sporting goods, and health care sales were among the leaders.

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