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Wholesale prices drop
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July 14, 1999: 1:08 p.m. ET
June PPI declines 0.1%; retail sales trail forecast as auto sales drift back
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NEW YORK (CNNfn) - Wholesale prices unexpectedly slipped while retail sales climbed slightly in June, the government said Wednesday, but economists warned inflation may lurk to unsettle the still-strapping U.S. economy.
Economists said the inflation picture for now is tame and the reports aren't likely to cause policy makers at the Federal Reserve to pull the trigger on interest rates anytime soon.
The nation's producer price index fell a seasonally adjusted 0.1 percent in June, led by a drop in prices for cars and computers, the Labor Department said. It was the first decline in the PPI since February's half-percent drop.
Economists had expected a rise of 0.1 percent, according to a Reuters poll, after a May increase of 0.2 percent. The "core" rate, which excludes food and energy prices, fell 0.2 percent; economists expected a rise of 0.1 percent.
Meanwhile, the Commerce Department said retail sales climbed 0.1 percent on a seasonally adjusted basis in June, falling short of expectations for an increase of 0.3 percent.
The May retail sales gain was revised upward two-tenths of a percentage point to 1.2 percent, buoyed by a 3.5 percent gain in auto sales, the fastest rate in more than 2 years and a record annual clip.
"I'd say this doesn't provide any evidence [for an interest rate move] one way or the other," Mickey Levy, chief economist at BankAmerica, told CNNfn. At its June 30 meeting, the Fed increased interest rates by a quarter-point and said it has no plans to increase rates again anytime soon.
"[The numbers] confirmed the existing pattern of very strong growth with virtually no inflation," David Jones, chief economist at Aubrey G. Lanston, said. "They make the Fed look better by tightening a notch but then moving to a neutral bias."
Jones said the numbers were enough to spur Lanston Wednesday to raise its second-quarter gross domestic product growth estimate up to 4.0 percent from 3.5 percent.
"I don't see the slightest evidence anywhere that we are in the process of slowing. Everything is still full speed ahead," he added.
Concern about future production costs
Behind the wholesale numbers were lower vehicle prices. Passenger car prices fell 1.3 percent, while light truck prices shed 0.7 percent. Energy costs eased 0.3 percent, while food prices climbed 0.4 percent.
Analysts said the seemingly non-inflationary reports masked a devil in the details -- that prices soon may be on the upswing.
"The PPI figures were not nearly as good as advertised during June," wrote Mark Vinter, an economist at First Union, in an e-mail note to his clients and reporters. Despite the declines, Vinter said, "inflationary pressures are clearly building up further back in the production pipeline."
While prices for finished goods such as cars and gasoline were lower, costs for goods used at earlier stages of production -- at the "pipeline" level -- were higher.
Prices of raw materials rose another 1.4 percent in June after a 5.5 percent surge in May, and the cost of partly finished goods rose 0.4 percent after a 0.2 percent increase in May.
"That's significant. It's something the Fed will be watching closely to see if that pipeline will spill over into finished goods prices," Jones said.
Retail sales still won't slow
Excluding auto sales, which fell 1 percent in June, the retail sales index rose 0.4 percent, in line with economists' forecasts. Building materials, merchandise and clothing sales all increased, while retail gas sales declined.
Kathleen Stephansen, senior economist at Donaldson Lufkin & Jenrette Securities Corp., said the report points to a still-strong U.S. economy.
"Retail sales continue to show strength. There's not a convincing deceleration here," she said.
The bond market headed lower after the reports. The 30-year Treasury issue was up 1/32 in price for a yield of 5.9 percent. 
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