- The Washington Times - Tuesday, March 21, 2006


A big drop in energy costs helped push prices at the wholesale level down last month by the largest amount in nearly three years. But with the cost of gasoline rising again, the reprieve could be short-lived.

The Labor Department reported yesterday that wholesale prices fell 1.4 percent in February as food and energy recorded big declines.

But analysts cautioned against reading too much into the February decrease, saying it was heavily influenced by a warmer-than-normal winter, which cut demand for home heating fuel and helped energy producers rebuild inventories that had been depleted after last fall’s hurricanes.

The government reported Monday that the average retail price of gasoline soared by 13.8 cents last week to $2.50 a gallon for regular grade. Unleaded gasoline futures are up by 42 cents a gallon since mid-February.

The rise in futures contracts soon will be pinching motorists at the pump, and what happens to crude oil prices remains the big wild card regarding what will happen with inflation this year. While crude oil prices have dipped below $60 a barrel this week, it is uncertain how long they will stay at that level.

“Your guess on where oil prices are going to go is as good as mine,” said David Wyss of Standard & Poor’s. “It just depends on the Middle East, and who knows what is going to happen there.”

The drop in the overall Producer Price Index was much larger than Wall Street had been expecting. It followed a report last week that the closely watched Consumer Price Index edged up a tiny 0.1 percent last month after a 0.7 percent jump in January.

Aside from energy and food, core prices at the wholesale level rose by 0.3 percent last month, a slightly bigger increase than the 0.1 percent economists had been expecting.

Mark Zandi of Moody’s Economy.com, said he believed core inflation at the consumer level, which last year was 2.2 percent, would be 2.5 percent this year.

Increasing labor costs, reflecting a stronger job market, and an expected weaker dollar, which will drive up import prices, will contribute to pushing core inflation higher, he said.

The Federal Reserve, which would prefer to keep core consumer prices rising at around 2 percent, will be closely watching the increase in inflation pressures, Mr. Zandi and other economists predicted.

The central bank will hold its first interest-rate-setting meeting with Ben S. Bernanke as Federal Reserve Chairman Monday and yesterday. Analysts think they will vote for the 15th straight quarter-point increase in the federal funds rate, which is the interest banks charge each other, since policy-makers began tightening credit nearly two years ago.

Many economists think as long as inflation does not worsen significantly, the Fed is likely to increase rates one more time at the May 10 meeting, pushing the funds rate to 5 percent, and then move to the sidelines for the rest of the year.

“There is a certain appeal to going to a nice round number like 5 percent,” said Bill Cheney, chief economist for John Hancock Financial Services in Boston. “But if we get some bad inflation numbers, then they won’t stop at 5 percent.”

The retreat in wholesale prices last month was the largest one-month decline since a similar 1.4 percent plunge in April 2003.

Gasoline prices were down 11 percent, the biggest drop in nearly three years, while natural-gas prices fell by 4.1 percent and liquefied petroleum gas, used for heating homes, dropped by 14.3 percent. Those declines reflected the fact that demand was reduced because of the unusually warm January, analysts said.

Food prices were down 2.7 percent last month, the biggest drop in nearly four years, led by a 27.1 percent decline in vegetable prices.

There was a 0.5 percent rise for light trucks, the category that includes sport utility vehicles. Prices were also up for pharmacy products, newspapers and other periodicals, and construction machinery.

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