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Producer prices inch up
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August 13, 1999: 3:51 p.m. ET
PPI rose just 0.2% in July, but economists say Fed rate hike still likely
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NEW YORK (CNNfn) - Prices at the wholesale level rose modestly in July as lower food and car prices mostly offset rising energy costs, the government said Friday, in the latest sign of benign inflation despite the strong economy.
The producer price index rose 0.2 percent last month after falling 0.1 percent in June, the Labor Department said. Economists had forecast a 0.3 percent increase.
"I really don't think we're building inflation," said Robert Brusca, chief economist with Ecobest Consulting.
Excluding food and energy, the so-called core PPI was unchanged, below forecasts for a 0.1 percent rise.
Investors celebrated after the report, reasoning it lessened the pressure on the Federal Reserve to raise interest rates much further, though most still expect the central bank to increase rates again when Fed policy-makers meet Aug. 24.
As of 3:45 p.m., the Dow Jones industrial average was up about 180 points while the Nasdaq Composite index was up 83 points. The 30-year Treasury issue rose 1-3/32, lowering the yield to 6.10 percent on the newly issued bond from 6.19 percent Thursday. The old long bond, no longer a benchmark, yielded 6.26 percent Thursday.
The PPI measures inflation at the wholesale level, before prices reach the consumer. The report will be eyed closely by the Fed, which raised rates in June in a bid to slow the nation's rapid economic growth and ward off inflation.
Despite the better-than-expected core number, economists said the Fed is still likely to lift interest rates again after a second-quarter spike in wages and last month's rise in job growth.
"This is a very friendly report. The core is what everybody is really going to focus on and that flat core is really quite friendly," said Phil Hill, an economist with Briefing.com. "It may make (the Fed) think twice, but I still think the chances are better for a tightening on the 24th."
Greenspan is eyeing the PPI
The Fed will also be monitoring the PPI's sister report, the Consumer Price Index, next Tuesday.
But investors who pushed stocks and bonds higher apparently were betting the expected rate hike will be the Fed's last for a while. Higher rates slow the economy and can head off inflation, but also hurt corporate profit growth, thus depressing stock prices.
In its report, the department said energy prices rose 3.4 percent. Gasoline prices climbed 12.7 percent and heating oil costs jumped 15.2 percent, the fastest rate of increase since 1990.
On the downside, food prices fell 0.9 percent, while passenger car prices slipped 0.2 percent and computer prices were down 1 percent.
Tempering the market gains, however, were continued signs inflationary pressures may lurking in the pipeline, even though they haven't seemed to reach consumers in recent years.
Prices for intermediate goods -- such as flour from wheat before it becomes bread -- rose 0.6 percent in July, after a rise of 0.4 percent in June. But the price index for crude goods -- such as wheat -- fell 0.2 percent after June's gain of 1.4 percent. 
-- from staff and wire reports
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U.S. Labor Department
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