Wholesale prices, industrial production fall in June

WASHINGTON (AP) -Wholesale prices fell by 0.3 percent in June and big industry production was down as well, unexpected developments that one analyst likened to the economy hitting a speed bump.

A retreat in food and energy costs caused the drop in the Producer Price Index, the biggest in a year, the Labor Department reported Thursday. That came after wholesale costs shot up in the prior two months, reflecting sharply higher prices for energy and food. Wholesale prices had risen by 0.7 percent in April and by 0.8 percent in May.

The latest reading on the PPI, which measures the prices of goods before they reach store shelves, surprised economists, who were forecasting a 0.2 percent rise in wholesale prices in June.

Separately, the Federal Reserve reported that industrial production at the nation's factories, mines and utilities dropped 0.3 percent in June, it marked the largest decline since April 2003. That followed a 0.9 percent advance in May.

June's performance was weaker than the 0.1 percent rise analysts were predicting.

Factory production dipped 0.1 percent in June, down from a 0.6 percent advance. Output at utilities, which jumped 3.7 percent in May, declined 2.3 percent in June as temperatures returned to more normal levels after being unseasonably high in the previous month. Mining output nudged up 0.1 percent, after being flat in May.

"The economy hit a speed bump in June," said Ken Mayland, president of ClearView Economics. The reports indicate the Federal Reserve can stick with its gradual approach to raising interest rates, he and other analysts said.

On Wall Street, stocks moved lower. The Dow Jones industrials lost 14 points and the Nasdaq was down 3 points in morning trading.

In other economic news, new claims for unemployment benefits jumped last week by a seasonally adjusted 40,000 to 349,000, the Labor Department said. In the prior week, claims plunged by 40,000.

A portion of last week's increase was due to layoffs associated with temporary shutdowns at automobile plants to retool for new models, a department analyst said.

Those temporary shutdowns occur around the same time each year, and they make the jobless claims numbers especially volatile. Such wide swings in applications for benefits also make it difficult for economists to divine their significance in terms of analyzing the health of the labor market.

The Commerce Department also reported that businesses boosted inventories by 0.4 percent in May and their sales rose by 0.7 percent - an encouraging sign that companies are increasing investment.

On the inflation front, "core" wholesale prices - which exclude volatile energy and food prices - rose by a modest 0.2 percent in June, down from a 0.3 percent advance in May. The increase in core prices matched economists' expectations.

Fed Chairman Alan Greenspan and his colleagues at their June meeting said they were holding to the view that inflation currently doesn't pose a problem to the economy and that short-term interest rates can be moved up gradually. But if inflation shows signs of becoming a problem, the Fed said it will take more aggressive action "to fulfill its obligation to maintain price stability."

Fed policy-makers at that June 30 meeting boosted interest rates for the first time in four years in an effort to make sure the expanding economy doesn't ignite an unwelcome rise in inflation. The Fed increased a key rate to 1.25 percent, from a 46-year low of 1 percent.

"Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors," the Fed said at the time. Policy-makers said they expected underlying inflation "to be relatively low."

Energy prices, after soaring by 1.6 percent in both April and May, declined by 1.6 percent in June, the wholesale price report showed. Gasoline prices, while higher than a year ago, dropped by 5.2 in June. Residential electric power prices declined by a record 2.9 percent, surpassing the previous record one-month drop of 1.3 percent registered in September 1995. Residential natural gas prices, however, rose by 3.1 percent in June.

Food prices, which rose by a sharp 1.4 percent in April and 1.5 percent in May, declined by 0.6 percent in June. Rising food prices in part reflected higher transportation costs due to more expensive fuel. Easing energy prices helped to calm down food costs in June.

Falling prices for vegetables, fruits and dairy products offset rising prices for beef and veal and soft drinks.

The 0.3 percent drop in overall wholesale prices in June was the largest since a 0.4 percent decline in May 2003. It marked the first decrease since November, when prices slipped down by 0.1 percent.

Even with the decline in wholesale prices in June, these prices have been on the rise this year.

In the first six months of this year, wholesale prices have gone up at a seasonally adjusted annual rate of 5 percent, compared with a 3 percent pace for the last six months of 2003. Core prices, meanwhile, have increased at a 2.5 percent rate so far this year, compared with a 1.2 percent rise for the last six months of 2003.