Wholesale Prices Drop And Markets Shoot Higher May Numbers Create Longest String Of Price Declines In 45 Years

The longest string of wholesale price declines in nearly 45 years provided more fuel for the record-breaking stock market, reassuring investors that interest rate increases were not needed to control inflation.

The Labor Department said Friday its Producer Price Index for finished goods fell 0.3 percent in May, marking the first five-month series of drops since August-December 1952. Many analysts had expected a small advance.

“After more than six years of economic expansion, inflation remains completely absent,” said economist Bruce Steinberg of Merrill Lynch & Co. in New York.

“Between extremely favorable inflation news and three consecutive months of declining retail sales, the (Federal Reserve) is very unlikely to tighten policy” at its next rate-setting meeting July 1-2, he said.

Economist Bill Cheney of John Hancock Financial Services in Boston agreed. “I can’t imagine the news getting any better,” he said. “I can’t see why the Fed will need to move any time soon.”

The stock market continued its surge after the news, pushing the Dow Jones industrial average to record highs for the sixth straight day.

The Dow, which moved past the 7,600 and 7,700 marks on Thursday, closed up an additional 70.57 at 7782.04.

The bond market also cheered, with investors pushing yields down to 6.72 percent by midday, from 6.77 percent late Thursday. Prices and yields move in opposite directions.

In a separate report, the Commerce Department said both business inventories and sales rose 0.3 percent in April. The stockpile gain was the fifth straight and analysts said the decline in retail sales last month suggested inventories moved higher in May as well.

The decline in producer prices meant costs at the wholesale level were down by a 3.9 percent annual rate for the year so far. The index measures prices for goods just before they reach the consumer level.

Analysts expect a barely perceptible increase in consumer prices when they are reported on Tuesday.

The PPI drop was led by a 2.1 percent decrease in energy prices, also the fifth in a row. Food costs, on the other hand, were up 0.4 percent.

Excluding those often-volatile components, the so-called core PPI fell 0.3 percent, the sharpest decline since October 1994, due to lower costs for goods ranging from cars to computers to toys.

Among energy components, gasoline prices dropped 2.1 percent and the cost of natural gas for residential use fell 1.3 percent, offsetting a 2.2 percent increase in heating oil. In the food index, coffee was up 5.8 percent. Beef, pork and fish also rose, but poultry declined.

Fresh fruit shot up 7.9 percent, including a 70.5 percent increase for lemons and a 27.9 percent jump for strawberries. Vegetable prices rose just 0.1 percent, with big increases in green peppers, radishes and tomatoes offsetting declines for squash, lettuce and snap beans.

The report also suggested little inflation pressure in the pipeline. Prices for intermediate goods dipped 0.2 percent after falling 0.3 percent a month earlier.