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May PPI right in line
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June 11, 1999: 11:29 a.m. ET
Modest 0.2% gain, combined with healthy retail sales, cloud rate picture
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NEW YORK (CNNfn) - Producer prices cooled somewhat during May as oil prices dropped dramatically, but a stronger-than-expected increase in retail sales left investors increasingly anxious about a likely interest rate increase later this month.
The producer price index for finished goods rose 0.2 percent in May, according to the U.S. Labor Department. That matched the consensus of analysts surveyed by Reuters while dipping below the 0.5 percent jump posted in April.
Meanwhile, the U.S. Commerce Department reported retail sales jumped a seasonally adjusted 1.0 percent in May to $242.2 billion, slightly above analysts' projections of a 0.8 percent gain and the upwardly revised 0.4 percent April increase.
Investors were watching both numbers closely for any further indications that inflation might be on the rise, but analysts said the mixed bag results likely gave the Federal Reserve no impetus to stray from their bias toward tightening rates, most likely by a quarter point, later this month.
"All of this tells me that the economy is going to continue to grow at a 4 percent rate, and I think the Fed is very well aware of that," said Wayne Angell, senior economist with Bear Stearns in New York. "Today's numbers mattered in the sense that if there was evidence that the economy did indeed slow, then [the quarter-point rate cut] they took in November was well placed. But that clearly isn't happening."
The numbers clearly did little to alleviate the financial markets' jitters. The Dow Jones jumped between positive and negative territory in its first ninety minutes of trading, while the benchmark 30-year treasury bond dropped 6/32 with a yield of 6.07 percent, indicating investors still see a rate hike on the horizon.
Energy prices cooled the PPI
After stripping out the volatile food and energy sectors, the PPI core rate rose 0.1 percent, matching both analysts' consensus and the rate in April.
Government officials attributed the slower rise in the prices producers charge for finished goods to a sharp fall-off in the price for energy products, which showed no change during May after soaring 5.1 percent during April. Conversely, food prices jumped 0.5 percent after declining 0.9 percent during April.
The price of crude goods -- which measures the price of goods further back in the pipeline - leapt by 5.5 percent during May, the largest one-month increase since December 1996. However, much of that increase was attributable to a nearly 12 percent jump in crude oil prices, a carryover from the April price increase after a year-long slump, analysts said.
"It's something of a blip," Angel said. "It's not inflation. It's just a removal of a deflation component that was showing up earlier."
While the PPI revealed few surprises, however, the healthy increase in retail sales further worried inflation-leery investors.
Continued strong consumer demand for automobiles accounted for much of the retail sale increase. New car sales rose 2.5 percent to $60.45 billion after falling 0.8 percent in April. Excluding that sector, overall sales were up 0.5 percent, in line with analysts' projections.
Some analysts feared the overall jump in retail sales might represent a red flag to Federal Reserve members already leaning toward a rate hike. But others believe the markets already are prepared for rates to tighten and would ultimately take heart in the economy's continued strong gains.
"This is good news," said Richard Yamarone, senior economist with Argus Research. "For all intents and purposes, this is really good data. Some equities should rally on this."
Yamarone and other economists projected the real litmus test for a possible movement on interest rates will come next Wednesday when the May consumer price index -- a broader measure of which direction consumer prices are moving -- is released.
"I firmly believe that the Fed does not know what it's going to do, certainly not at this point," Yamarone said. CPI is "the big linchpin in this whole thing."
The Federal Reserve's Open Market Committee announced last month that it was shifting its bias toward tightening interest rates at its next scheduled meeting June 29 and 30. Comments in recent days from FOMC members have done little to indicate the Fed has changed its mind. 
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