July 15, 2004

WASHINGTON (AP) — Economic reports out Thursday showed inflation tame at the wholesale level but the number of people filing initial claims for unemployment benefits rose last week.

Wholesale prices fell 0.3% in June, biggest decline in a year, as energy and food costs retreated. The report underscores Federal Reserve policymakers' belief that inflation isn't yet a big threat to the economic recovery.

The unexpected drop in the Producer Price Index, which measures the prices of goods before they reach store shelves, comes after wholesale costs shot up the prior two months because of sharply higher prices for energy and food. Wholesale prices rose 0.7% in April and 0.8% in May.

The latest reading on the PPI surprised economists, who were forecasting a 0.2% rise in wholesale prices in June.

In other economic news, new claims for unemployment benefits jumped last week by a seasonally adjusted 40,000 to 349,000, the Labor Department. In the prior week, claims plunged by 40,000.

Part of last week's increase was due to layoffs associated with temporary shutdowns at automobile plants to retool for new models, a department analyst said.

Those temporary shutdowns occur around the same time each year and make the jobless claims numbers especially volatile. Such wide swings in applications for benefits also make it difficult for economists to divine their significance in terms of analyzing the health of the labor market.

In a third report Thursday, the Commerce Department said businesses boosted inventories 0.4% in May and sales rose 0.7% — an encouraging sign that companies are increasing investment.

On the inflation front, "core" wholesale prices — which exclude volatile energy and food prices — rose a modest 0.2% in June, down from a 0.3% advance in May. The increase in core prices matched economists' expectations.

Federal Reserve Chairman Alan Greenspan and his colleagues at their June meeting said they were holding to the view that inflation currently doesn't pose a problem to the economy and that short-term interest rates can be moved up gradually. But if inflation shows signs of becoming a problem, the Fed said it will take more aggressive action "to fulfill its obligation to maintain price stability."

Fed policymakers at that June 30 meeting boosted interest rates for the first time in four years in an effort to make sure the expanding economy doesn't ignite an unwelcome rise in inflation. The Fed increased its target for a key interest rate to 1.25%, from a 46-year low 1%.

"Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors," the Fed said at the time. Policymakers said they expected underlying inflation "to be relatively low."

Energy prices, after soaring by 1.6% in both April and May, declined 1.6% in June, the wholesale price report showed. Gasoline prices, while higher than a year ago, dropped 5.2% in June. Residential electric power prices declined a record 2.9%, surpassing the previous record one-month drop of 1.3% in September 1995. Residential natural gas prices, however, rose 3.1% in June.

Food prices, which rose a sharp 1.4% in April and 1.5% in May, declined 0.6% in June. Rising food prices in part reflected higher transportation costs due to more expensive fuel. Easing energy prices helped to calm food costs in June.

Falling prices for vegetables, fruits and dairy products offset rising prices for beef and veal and soft drinks.

The 0.3% drop in overall wholesale prices in June was the largest since a 0.4% decline in May 2003. It marked the first decrease since November, when prices slipped 0.1%.

Even with the decline in wholesale prices in June, these prices have been on the rise this year.

In the first six months this year, wholesale prices have risen at a seasonally adjusted annual rate of 5%, compared with a 3% pace for the same period last year. Core prices, meanwhile, have increased at a 2.5% rate so far this year, compared with a 1.2% rise for the corresponding period last year.

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