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U.S. producer prices fall
July 13, 2001: 10:19 a.m. ET

PPI index down more than expected in June; retail sales gain slightly
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NEW YORK (CNNfn) - Wholesale prices fell in the United States in June, while retail sales rose slightly, the government said Friday, indicating inflation pressures are low and consumer spending is surviving in the world's largest economy.

The Producer Price Index (PPI) fell 0.4 percent last month after May's 0.1 percent rise, the Labor Department reported. It was the biggest drop in PPI since a 0.5-percent fall in February 1999. Wall Street economists surveyed by had forecast that the PPI would fall only 0.1 percent.

"Core" PPI, which excludes volatile food and energy prices, rose 0.1 percent, matching analysts' forecasts, after a 0.2-percent gain in May.

"The PPI numbers are just terrific," said Neal Soss, chief economist at Credit Suisse First Boston. "Inflation [is] at levels that are not a problem."

Separately, retail sales rose 0.2 percent in June after May's upwardly revised 0.4 percent rise, the Commerce Department reported. Wall Street economists surveyed by had forecast retail sales would rise 0.3 percent.

Excluding auto sales, retail sales fell 0.2 percent -- the first such decline in three months -- after a revised 0.4-percent gain in May. Analysts expected a gain of 0.2 percent.

U.S. stocks opened slightly lower after the news. U.S. Treasury bond prices were mixed, with short-term issues falling slightly and the inflation-sensitive 30-year bond gaining.

Consumers hanging on

The retail sales data are an indicator of consumer spending, which makes up two-thirds of the U.S. economy and has remained relatively strong during an economic slowdown that's resulted in hundreds of thousands of job cuts this year.

"The retail sales report underscores that consumers still are providing a degree of support for the economy as a whole," said Kevin Flanagan, fixed income strategist at Morgan Stanley. "It's somewhat encouraging to see that spending for big-ticket items remains on a positive swing."

Underscoring the resiliency of consumer spending, the University of Michigan's closely watched consumer sentiment index rose to 93.7 percent in July, according to a Reuters report, compared with a reading of 92.6 percent in June. Analysts surveyed by expected an index reading of 93.0 percent.

The Federal Reserve has cut its target for short-term interest rates six times this year in an effort to keep consumers spending. Friday's tame inflation data may allow it to make more cuts if spending begins to slow.

"These numbers give the Fed license to cut rates as much as necessary," Anthony Chan, chief economist for Banc One Investment Advisors, told CNNfn's Before Hours.

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The Fed could be troubled by the fact that the only sign of solid strength in June sales was for new cars and trucks, which climbed 1.5 percent following a 0.2-percent gain in May and may have been mostly attributable to automaker discounts.

"The good car sales are due to incentives," said David Horner, a senior financial strategist with Merrill Lynch. "In the case of non-auto retail sales, if you take Wal-Mart (WMT: down $0.66 to $51.19, Research, Estimates) out, chain-store sales are flat. It looks like the consumer eased up in June, and [what] the consumer did buy was... discounted goods."

Still, electronics and appliance-store sales gained 1.1 percent in June after being flat in May, and general merchandise store sales were up 0.4 percent following a 1.3 percent drop in May -- meaning not all the strength was in auto sales.

Inflation tame

Analysts had expected inflation to ease after steep gains earlier this year driven by a big jump in energy prices. They also said the sharp slowdown in economic activity was helping to ease inflationary pressures as wage demands soften with the rising jobless rate.

"Inflation is not a problem and generally isn't during periods of economic weakness," said Richard Yamarone, senior economist with Argus Research Corp. "This is simply because producers cannot pass along increased prices."

Also keeping prices down in June was a 2.5-percent plunge in energy costs, the biggest one-month decline since a 3.5 percent drop in April 2000.

The good news on energy reflected record drops of 1.5 percent in residential energy costs and 5.8 percent in natural gas prices. Gasoline prices fell by 3.7 percent, the biggest decline since a 3.9 percent fall last August.

Economists had been predicting that energy prices would retreat following a sharp run-up last winter caused by scarcity. Still, residents of California face difficult problems and potential power shortages this summer because of the shortage of electrical generating capacity.

Motorists this summer have been getting a break at the gas pump after world crude oil prices eased and refiners rushed to fill shortages that developed during the spring. graphic

- from staff and wire reports


U.S. jobless claims soar in latest week - July 12, 2001

Report: California risks gas shortage - July 12, 2001

Fed cuts interest rates a quarter point; sixth cut in 2001 - June 27, 2001

Gas prices drop - June 25, 2001

May retail sales weak - June 13, 2001


PPI report

Retail sales report

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