Producer Price Drop Biggest in 11 Years

WASHINGTON — Producer prices fell another 0.2% in December, the government reported Thursday, bringing their decline for all of 1997 to 1.2%--the largest yearly drop in wholesale prices since world oil prices collapsed in 1986.

The figures, expected to be matched by a similarly bullish report on consumer prices later this month, provided more dramatic evidence that the nation is approaching its long-held goal of price stability following the wave of inflation in the 1970s and ‘80s.

In 1996, wholesale prices rose 2.8%.

The producer price index’s “core” rate of inflation, which excludes volatile food and energy prices, fell 0.1% during December, resulting in a 0.1% rise for all of 1997--the smallest rise since the Labor Department began tracking the rate in 1973.

At the same time, economists said the yearly decline left the economy well short of the much-feared “deflation” that some analysts have been predicting.

Federal Reserve Board Gov. Laurence H. Meyer said there was virtually no risk that the U.S. economy might enter a period of dangerous deflation--that is, a prolonged decline in wages and prices--despite contentions by a few economists that such a scenario may be in the offing.

Meyer, in a speech before the Economic Strategy Institute, a nonpartisan research group in Washington, said that while outright deflation is always possible at some point, it currently is not a concern for policymakers.

Instead, he said, mounting wage pressures--expected to continue amid growing labor shortages in the United States--are likely to boost inflation slightly in 1998, despite an expected slowdown in the economy’s overall growth rate.

The index deals only with prices of goods and excludes services, which account for much of the nation’s output.

Analysts generally welcomed the December figures, which they said provide further incentive for the Fed not to raise interest rates, despite some pressure from climbing wages. The central bank has been holding rates steady, mainly in response to the financial turmoil in Asia.

The broad-based decline in producer prices has mixed implications for the economy. Although the price declines threaten to crimp corporate profits in coming months, analysts noted that some business costs were declining, which should help offset that.

The figures indicate a boon for consumers, who most likely will find inflation at the consumer level continuing at a modest pace through most of this year. Consumer prices are believed to have risen by about 2% in 1997.

Economists said the December price figures, which followed an identical 0.2% drop in November, do not appear to reflect any impact from the problems in Asia, which are expected to intensify pressure on U.S. producers to keep holding their prices down. They said such pressures could appear in coming months.

The Labor Department also reported that new claims for unemployment insurance benefits rose by 20,000 during the week ended Saturday, a somewhat faster increase than had been expected.

However, economists said the increase may not portend a slowdown in the economy’s growth rate, because the figures may have been skewed by layoffs of temporary workers hired for the holidays. A report on the employment picture is due out today.

Meyer in effect confirmed predictions that the Fed is likely to hold off on raising interest rates, largely because of the Asian crisis, which is expected to dampen economic growth here by crimping sales of U.S. exports.

But he cautioned that the central bank could move to increase rates slightly if the economy continues to grow so rapidly that it strains the nation’s productive capacity. He also predicted that productivity--or output per work hour--is apt to decline.

The Fed last raised rates in March, when, in a “preemptive strike” to ward off inflation, it boosted by a quarter of a percentage point its so-called federal funds rate--the interest banks charge on overnight loans to one another.

Since then, however, the Federal Open Market Committee, the 12-member Fed panel that sets money and credit policies, has consistently voted to keep rates where they are. The group is next scheduled to meet Feb. 3-4.

December’s 0.2% drop in producer prices was in the index of finished goods, the final stage of the production process. Prices at the intermediate level fell 0.2%, dropping 0.8% for theyear. Prices for crude-materials prices fell 5.6% in December, or 11.7% for the year.

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Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

Dec.: 131.7

Source: Bureau of Labor Statistics