March 16, 1995 in Nation/World

Inflation Fears Fuel Dollar’s Slide Higher Wholesale Prices Send Greenback, Dow Into New Dive

Associated Press
 

Reports raising fresh inflation worries sent the dollar tumbling anew Wednesday despite reassuring words from the Federal Reserve that the economy was slowing to a sustainable growth rate.

The dollar flirted once again with record lows against the German mark and Japanese yen with the currency turmoil dragging down stock and bond prices as well.

The market turbulence began when the government reported that prices at the wholesale level climbed 0.3 percent in February while industrial production shot up 0.5 percent, pushing the factory operating rate to its highest level in more than 15 years.

The two stronger-than-expected reports rekindled inflationary fears only a day after a big drop in retail sales had been viewed by investors as evidence the economy was finally slowing to a rate less likely to cause problems.

Economists said it was not unusual for the economy to send out mixed signals at major turning points, and they predicted the volatility in market sentiment, too, would continue for several more months until the economy’s course becomes more clear.

The Labor Department reported Wednesday that the increase in its Producer Price Index was led by higher costs for food, energy and drugs.

And economists said big increases in the cost of goods at the crude and intermediate levels pointed to worse inflation down the road.

In a second report, the government said industrial production was up 0.5 percent last month, double the expected increase, as the nation’s factories, mines and utilities operated at 85.7 percent of capacity, the fastest clip since October 1979.

While both of those reports raised concern that the economy was still growing too rapidly and inflation was beginning to increase, a third report showed that business inventories accumulated at a rapid pace in January, suggesting that factories will soon be forced to cut back production in an effort to reduce unwanted stockpiles.

The Federal Reserve endorsed the slowdown scenario in its latest survey of economic conditions nationwide.

“Reports from the 12 Federal Reserve districts suggest that the pace of the economic expansion has slowed over the past two months,” the Fed said, adding, “There is little evidence that strength in labor markets or increases in commodity prices have spilled over into wages or prices of finished goods.”

But these comments failed to calm jittery markets. The dollar neared the record lows set last week against the Japanese yen and the German mark before rebounding slightly. And the renewed dollar weakness spilled over into stocks and bonds. A day after hitting a new high, the Dow Jones industrial average closed down 10.38.

The inflation report showed that food prices were up 0.3 percent, a sharp turnaround after having dropped 0.6 percent in January. Prices turned up for dairy products, eggs, coffee and rice.

Energy prices rose 0.4 percent in February following a 2.3 percent January gain. The slowdown reflected smaller increases in gasoline prices.

© Copyright 1995 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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