Saturday, August 11, 2001

Economists: Rate cut near

Wholesale prices drop 0.9%; inflation risk low

By Jeannine Aversa
The Associated Press

        WASHINGTON — A sharp drop in the cost of gasoline and other energy products helped drive down wholesale prices in July by the largest amount in eight years.

        With inflation low, Federal Reserve policy-makers will have more leeway to continue reducing interest rates in their effort to avert a recession when they meet Aug. 21, economists said.

        The 0.9 percent plunge in July's wholesale prices, reported Friday by the Labor Department, came after a Fed survey of business conditions around the country that suggested the economy had stalled in June and July.

        Against the backdrop of that gloomy report and the inflation news, some economists said they were not ruling out a half-point cut in interest rates in August, although many think the Fed will opt for a more conservative quarter-point cut.

        “The Fed has a free hand to do what is necessary to overcome the sluggishness in the economy ... a 50 basis-point cut would not be unreasonable,” said economist Joel Naroff, president of Naroff Economic Advisors.

        The bigger-than-expected slide in last month's Producer Price Index, which measures price pressures before they reach store shelves, followed a 0.4 percent decrease in June, and was the largest decline in wholesale prices since August 1993.

        “The collapse in energy prices is good news for consumers and for producers and gives the Fed a lot of elbow room to keep lowering interest rates as needed,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

        One of the reasons the Fed has been able to cut interest rates six times this year, by a total of 2.75 percentage points, is because inflation hasn't posed a risk to the economy.

        Economists think inflation will remain contained in the months ahead. Soaring energy prices, which caused wholesale prices to spike by 1.1 percent in January, have eased in the face of eroding global demand. And the yearlong economic slowdown has made it harder for companies to raise prices and has made many of them reluctant to grant workers' big increases in pay and benefits.

        For the first seven months of this year, wholesale prices rose at an annual rate of just 0.5 percent, a big improvement over the 3.8 percent increase for the same period a year ago.

        Excluding volatile energy and food prices, the “core” rate of inflation edged up 0.2 percent in July, following a 0.1 percent gain. So far this year, core inflation has been rising at an annual rate of 1.7 percent, a bit faster than the 1.2 percent rate for the same period last year.

        In July, all energy prices fell by 5.8 percent, the biggest drop since August 1989. That followed a 2.5 percent decline in June.


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