Another Dip in Inflation Index Marks Record Run

WASHINGTON — The U.S. economy set another record as wholesale prices, as measured by the producer price index, fell in July for the seventh month in a row, providing further evidence that inflation is in check, the Labor Department reported Wednesday.

The 0.1% decline in the department’s producer price index, a measure of inflation that often presages price trends at the retail level, made for the longest-running drop in the index since the government began collecting such data 50 years ago.

The July dip left producer prices a full 3.1% below their level of last December, astonishing economists and briefly dampening some of the fears in the stock market, which has been worried that inflation would rebound.

At the same time, however, the Commerce Department reported that retail sales rose a respectable 0.6% in July--their second consecutive increase--suggesting that consumer spending is back on the rise. Retail sales rose 0.7% in June following a slump earlier last spring.

The combination of statistics showed that the economy is continuing to grow at a robust pace without any sign that inflation is worsening as a result. Statistics on retail prices are due out today.

Richard B. Berner, economist for the Mellon Bank in Pittsburgh, Pa., called the report on prices “incredible.” The news on inflation “just keeps coming in better than expected. This is just fantastic.”

At the same time, however, Berner said the real question is how long the good behavior on the price front could continue in the face of the apparent rebound in consumer spending during the first part of the summer.

Lyle E. Gramley, a former member of the Federal Reserve Board, agreed. The July report means that “the threat of inflation is not immediate,” but “I don’t think it means we’re out of the woods yet,” he said.

A jittery stock market apparently shared that two-sided assessment.

Shortly after the price report was made public, the Dow Jones industrial average surged 79 points, recovering from a 101-point decline on Tuesday. It later plunged 81 points, however, in reaction to the inflation fears sparked by the retail sales figures.

When all was said and done, the average of 30 blue-chip industrials closed at 7,928.32, down 32.52 from Tuesday’s level. Yields on the benchmark 30-year Treasury bond fell to 6.63%.

Berner said the volatility reflected “the debate over how threatening inflation really is.” Investors have been worried that the Federal Reserve Board may raise interest rates if it fears that inflation is apt to return.

But Robert G. Dederick, economist for the Northern Trust Co. of Chicago, said the markets had little to worry about in Wednesday’s figures. “They just don’t seem to be able to take ‘no inflation’ for an answer,” he said.

Despite the good performance, the Fed has vowed to remain vigilant because the economy has grown so rapidly that there are labor shortages in some regions, raising fears that wages may rise rapidly again.

*

Fed policymakers fear that a sharp rise in wage levels could force companies to raise prices more sharply, setting off a new round of inflation that would require a major tightening of monetary policy to overcome.

The nation’s unemployment rate already is at 4.8% of the work force--well below the 5.3% level at which economists say inflation pressures should begin to intensify--and has been hovering there for almost a year.

Analysts have been puzzled over how the economy has been able to grow so rapidly without reviving inflation pressures. Some have suggested that the price pressures are being offset by increases in worker productivity.

Although the statistics that measure productivity--or output per work hour--show only modest improvements in worker efficiency, critics say they are flawed and do not take full account of the use of computers.

Nevertheless, recent revisions in productivity figures have shown there is no evidence yet that worker efficiency is growing any more rapidly than the numbers suggest. Productivity rose a scant 0.6% last quarter.

If the consumer price report, due out today, shows inflation just as tame at the retail level, analysts will be convinced that the combination of moderate growth and low inflation will continue.

Most Fed-watchers believe that the central bank’s policy-setting Federal Open Market Committee is unlikely to boost interest rates at its next meeting, Aug. 19. But they say it could push them up sometime next year.

Although the economy is not technically in a state of deflation--a stage when prices and wages are in a sustained decline--the continued drops in producer prices are considered unusual.

Liberals have argued that the absence of any new inflation pressures shows that the Fed can safely let the economy grow more rapidly than it has. But mainstream economists and the financial markets have been cautious.

Many analysts believe the economy is headed for a pickup in the growth rate during the third and fourth quarters of this year, which they fear could reignite inflation pressures in the face of tight labor markets.

The July decline in producer prices followed dips of 0.1% in June and 0.3% in May and was partly the result of falling food and fuel prices, which fluctuate erratically from month to month.

However, in another bit of good news, the “core” inflation rate--which calculates the price rise without the volatile food and fuel indexes--also fell 0.1%, confirming that the overall drop was genuine.

The “core” index also has been edging down, though not as sharply as the overall price figure. Declines were posted at every stage of the production process: crude materials and intermediate and finished goods.

*

In one unusual development, wholesale prices of automobiles plunged 1.6% over the month, reflecting a softness in sales, following a 0.3% rise in June. Food prices fell 0.2%, while energy prices edged up a scant 0.1%.

Economists said the July rebound in retail sales figures suggests that consumers are stepping up their spending again after having taken a breather during the April-June quarter.

A nationwide consumer spending spree--the result of newfound optimism and cash resulting from fast-rising income levels--had buoyed the economy in late 1996 and early 1997, sending output growing at a stunning 4.9% annual rate.

Second-quarter figures showed the economy’s growth rate slowing during April, May and June to a 2.4% annual rate, but there has been evidence since then that spending is back up.