Wholesale Price Retreat Welcomed First Decline In Two Years Bodes Well For Economy

Prices at the wholesale level, pulled down by tumbling food costs, posted the first decline in more than two years in January.

“That means more thumbs-up for the economy,” said economist Robert Dederick of Northern Trust Corp. in Chicago. “Growth isn’t running amok and as a result, inflation is well contained.”

The Dow Jones average of 30 industrial stocks, which broke the 7,000 level for the first time Thursday, retreated nearly 34 points to 6,988.96 at the close of trading Friday. But a scary producer price report could have triggered a much sharper sell-off.

Prices charged by producers ranging from farms to factories fell a seasonally adjusted 0.3 percent in January, compared with a worrisome 0.6 percent increase in December, the Labor Department said Friday.

The bond market rallied with yields on 30-year Treasury bonds dropping to 6.53 percent at the close, the lowest level since Dec. 27 and down from 6.62 percent late Thursday. Lower bond yields, if sustained, can translate into lower mortgage rates for home buyers.

The Producer Price Index measures the cost of goods before they reach consumers. Its movements offer important clues for the future behavior of the Consumer Price Index, which tracks the price of both services and retail goods. January’s drop in prices of producers’ finished goods was the first since a 0.4 decrease in October 1994. It was helped by a 1 percent decrease in foods, the steepest in 5-1/2 years, and a 0.2 percent decline in energy.

But even excluding food and energy, where prices can fluctuate wildly, so-called core prices were unchanged last month after rising just 0.1 percent in December.

In another sign of a well-balanced economy, business inventories fell 0.1 percent in December after holding unchanged in November, the Commerce Department said. An unwanted buildup in inventories can cause layoffs and production cutbacks as businesses try to clear warehouses.

For all of 1996, producer prices rose 2.8 percent, the biggest increase in six years, but core prices rose only 0.6 percent. This year, economists expect an overall producer price rise of about 2.5 percent and a core increase of roughly 1.5 percent.