- The Washington Times - Tuesday, April 14, 2009

WASHINGTON (AP) - Wholesale prices dropped sharply last month as the cost of food, gasoline and home heating oil plummeted, fresh evidence that inflation appears to pose little immediate threat to the economy.

The Labor Department said Tuesday the Producer Price Index, which measures price changes before they reach consumers, fell a seasonally-adjusted 1.2 percent in March, compared with analysts’ expectations of no change. The PPI increased 0.1 percent in February.

The unexpected drop raises the specter of deflation, or widespread price declines. While that may sound like a good thing for shoppers, deflation can cause businesses and consumers to delay purchases, leading to a drop in production and a sharp economic downturn.

Wholesale prices have fallen 3.5 percent in the past year, the steepest drop in almost 60 years. But excluding volatile food and energy price changes, the core PPI has increased 3.8 percent in the last 12 months.

And Joel Naroff, president of Naroff Economic Advisors Inc., said wholesale prices for consumer goods have risen at a 3.4 percent annual rate in the past three months, making it “hard to argue that deflation is much of a threat.”

Declining food and energy prices largely drove last month’s overall drop. Gasoline prices plummeted 13.1 percent, while home heating oil fell 13.2 percent, the sharpest drops for both since December. Food prices fell 0.7 percent.

Excluding food and energy, the PPI was unchanged, below analysts’ forecasts of a 0.1 percent rise.

Most economists think inflation is unlikely to be a problem for some time given the prolonged recession, which has slowed economic activity and already matched the longest downturn in a quarter-century. Overall economic growth fell at an annual rate of 6.3 percent in the October-December quarter and many economists believe the gross domestic product also plunged in the first quarter of this year.

Still, massive government spending to bail out the financial industry and stimulate the economy, as well as a huge increase in lending by the Federal Reserve to unlock credit markets, have fueled concerns that inflation could follow once the economy begins to grow again.

Rising cigarette prices helped push the core wholesale inflation rate higher. Tobacco companies, including the Altria Group Inc.’s Philip Morris and Lorillard Inc., raised wholesale prices in March before a federal tobacco tax increase took effect April 1, according to economists at JPMorgan Chase. The tax jumped to $1.01 a pack from 39 cents.

Wholesale distributors, companies that buy from manufacturers and sell to retailers, have been clearing excess stockpiles for months in the face of weak demand and the slow economy. That also likely helped keep wholesale prices low last month.

Wholesalers cut their inventories by the largest amount in 17 years in February and increased sales for the first time since the summer, the Commerce Department said last week.

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