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Wholesale prices fall
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January 11, 2002: 9:33 a.m. ET
PPI shows a sluggish economy keeping inflation a distant threat.
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NEW YORK (CNN/Money) - Wholesale prices in the United States fell sharply in December, the government said Friday, showing inflation remained in check as the nation's first recession in a decade helped keep prices low.
The Producer Price Index - a measure of prices paid to factories, farmers and other producers - fell 0.7 percent after falling 0.6 percent in November, the Labor Department said. Economists surveyed by Briefing.com expected prices to fall 0.2 percent.
Excluding often volatile food and energy prices, the "core" PPI fell 0.1 percent after rising 0.2 percent in November. Economists surveyed by Briefing.com expected core prices to rise 0.1 percent.
"Inflation is on the mat and not getting up soon," said Oscar Gonzalez, economist with John Hancock Financial Services. "With the U.S. economy still in a recession and economies around the world weak, demand is slack and resulting in no inflationary pressures at all. Simply put, no one can raise prices."
December's drop in prices was led by energy prices, which tumbled 4 percent after sinking 3.8 percent in November. Gasoline prices dropped 8.2 percent, and heating oil prices plunged 14.2 percent.
For all of 2001, producer prices fell 1.8 percent, the biggest one-year drop since 2.3 percent in 1986, the Labor Department said.
U.S. Treasury bond prices rose after the data, with the promise of low inflation making bonds more appealing to investors. U.S. stock prices also rose.
The 30-year Treasury rose about half a point, lowering its yield, which moves in the opposite direction, to 5.38 percent from 5.41 percent late Thursday. The 10-year Treasury added about a quarter point to yield 4.94 percent versus 4.96 percent Thursday.
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Investors also were awaiting a speech by Federal Reserve Chairman Alan Greenspan about the state of the economy. The Fed cut its target for short-term interest rates 11 times last year in a bid to bolster the U.S. economy. Without the threat of inflation, the central bank's policy makers are free to cut rates again, if necessary, to stimulate the economy.
"When you measure [prices of ] both goods and services, you come up with a tame inflation environment, which is policy nirvana," said Anthony Chan, chief economist at Banc One Investment Advisors. "You can apply as much fiscal policy and monetary policy as you want without side effects."
But stimulative monetary policy, in the form of low interest rates, and fiscal policy, in the form of tax cuts and government spending, could be ineffective if they don't encourage spending by consumers and businesses.
Many economists are concerned that high levels of consumer debt will test the resilience of consumer spending, especially as unemployment creeps up to 6.0 percent and beyond. Companies, on the other hand, may not be willing to spend money on new production equipment because they still have a glut of it left over from the spending boom of the late 1990s.
The result of such a situation could be deflation, the complete inability of businesses to raise prices, hurting corporate profits and leading to an anemic recovery at best. So far, however, deflation has not been a real threat.
"The risk of deflation has increased. Is it a significant risk? Probably not," Chan said.
"[Consumer prices] are really what you have to worry about," Chan added. "In the consumer price index, there seems to be some extreme resiliency on the service side, which is much larger than the goods side. There's no deflation on the service side."
The Labor Department is scheduled to release its report on the December consumer price index next Thursday. Economists surveyed by Briefing.com expect it to rise 0.1 percent. 
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