Wholesale Prices Plunge 0.6% Lower Energy, Food Costs Set Stage For Steepest Drop Since 1993

Falling energy and food prices last month contributed to the deepest plunge in wholesale prices in almost four years. The good inflation news still left economists and investors uncertain about what it portends for interest rates.

Prices paid to producers - from farms to factories - fell 0.6 percent in April, capping four straight months of decline unparalleled since 1993.

“There is no inflation now and little in the pipeline,” said Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis. “The natural question is how long will this good luck continue.”

Much of the seasonally adjusted decrease in producer prices came from a 2.6 percent drop in energy costs. Wholesale food prices were also down last month, dropping 0.4 percent after a big increase in March.

Outside volatile food and energy, inflation was also benign with so-called core rate prices declining 0.1 percent, helped out by declining prices for passenger cars, prescription drugs and computers.

Wall Street welcomed the report, but an initial surge in stock prices Wednesday faded, leaving the Dow Jones industrial average up 11.95 to 7,286.16 for the day.

Today, the Labor Department will release the Consumer Price Index, which tracks what shoppers pay for goods and services.

It will be the last economic clue Fed policy-makers get before their meeting Tuesday, and many analysts now expect the CPI to be reassuring.

The Fed boosted interest rates a quarter-point in March and is considering another shove to keep the economy from racing out of control.

Sohn said falling prices may be viewed as only temporary and Fed policy-makers could well persist in believing the booming economy must be reined in to prevent inflation.

“The probability is high that inflation will accelerate,” he said.

But Marilyn Schaja, an economist with Donaldson, Lufkin & Jenrette Securities Corp. in New York, said declining prices could just as easily mean the economy is headed for a slower, more sustainable pace of growth, and the Fed may hold off on further action.

“I think that the Fed can afford to wait to see whether it’s part of this expected slowdown … or whether it’s a temporary phenomenon,” Schaja said.

The April drop in producer prices, largest since August 1993, followed declines of 0.1 percent in March, 0.4 percent in February and 0.3 percent in January. They marked the first time the index declined four times in a row since May-August 1993.