US wholesale prices rose slightly in July, easing fears that the Federal Reserve will lift interest rates by more than a quarter point later this month.
The producer price index, a gauge of wholesale prices, increased 0.2 per cent from June to July and is up 1.5 per cent from last July, the Labour Department said. The recent rises do not suggest rampant inflation but they do add to a growing number of figures pointing toward an overheating economy.
Markets reacted favourably to the report, even though the figures did little to change predictions for interest rate levels. The Dow Jones industrial average was up 121 points to 10,910 at midday, a 1.13 per cent rise led by technology stocks. It closed up 184.26 at 10,973.65. Reports of increasing labour costs have led to widespread predictions that the Federal Reserve will raise the federal funds rate when the Federal Open Market Committee meets on August 24th. Most analysts think a quarter percentage point increase is most likely, rather than a more aggressive increase of half a point.
The producer price index does not take labour costs into account but several aspects of the July figures lend support to predictions the Fed will want to cool the economy. The core index for crude goods, which excludes food and energy, rose 2.3 per cent. Energy prices, which rose 3.4 per cent, were one of the main culprits behind the increase in wholesale prices, offset by a 0.9 per cent drop for food. Tobacco prices were a surprise contributor to the producer price index's jump from July 1998, said Mr David Greenlaw, an economist with Morgan Stanley. Tobacco prices rose 30 per cent in the past year. They account for 3 per cent of the total increase, he said, and were responsible for two-thirds of the increase during the past year. Energy prices accounted for most of the remaining change.
Mr Alan Greenspan, chairman of the Federal Reserve, told Congress last month that he would act "promptly and forcefully" to cool the economy if there was evidence of inflationary pressures.
Economic reports since then have pointed clearly to a rate hike of some kind at the August meeting but not towards the Fed's long-term strategy. The Fed announced a neutral bias at its June meeting, after lifting the federal funds rate a quarter point. After the August meeting, Fed officials could stick with a neutral bias or signal more rate rises by announcing a tightening stance.
