June 12, 1996 in Nation/World

Wholesale Inflation Rate Drops Slightly

Associated Press

Wholesale inflation retreated a bit in May as energy prices declined after two months of troubling gains.

The good inflation news failed to cheer financial markets for long as many private economists continued to warn that a Federal Reserve interest rate increase still is likely next month.

The Labor Department reported Tuesday that its producer price index declined 0.1 percent last month, a better-than-expected showing that initially triggered a rally in both stock and bond prices.

However, the Dow Jones industrial average, which was up nearly 41 points in morning trading, gave up all of those gains and closed down 19.21 at 5,668.66. After an initial surge, demand for the 30-year Treasury bond fell, pushing the yield back up to 7.12 percent, unchanged from Monday when it had climbed to the highest level in more than a year.

Wholesale prices so far this year have been rising at an annual rate of 2.2 percent, little changed from a 2.1 percent increase for the first five months of 1995.

For May, energy prices at the wholesale level fell 0.6 percent. The cost of home heating plunged 7.3 percent and gasoline prices, which had been rising sharply in the past two months, held steady in May.

Many analysts said they expected even better news on energy in coming months.

Food prices were well-behaved for the second straight month in May, showing no change following a decline of 0.3 percent in April.

Excluding the volatile energy and food sectors, the underlying inflation rate showed no change in May and would have actually fallen had it not been for a huge 3.2 percent jump in tobacco prices, the biggest rise in this category in more than two years.

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