Originally created 08/14/97

Producer prices decline for seventh straight month



WASHINGTON (AP) - Prices paid to factories and other producers fell for an unprecedented seventh consecutive month in July - a record for the half century the government has kept track.

But a second report today showing two straight months of robust retail sales created anxiety that the economy could become overheated and ignite inflation.

After a brief rally on Wall Street, stocks and bonds gave up their gains and slipped into negative territory.

The index measuring prices paid by wholesalers continued to confound economists by inching down a seasonally adjusted 0.1 percent. They were predicting a 0.1 percent increase, but declines for goods from nectarines to computers more than offset gains for other items, the Labor Department said.

Separately, the Commerce Department reported retail sales rose 0.6 percent in July, the second consecutive increase. Sales are rebounding from a spring slump that produced declines from March through May.

"Producer prices are performing so well that it's hard to understand what's going on here with final demand (from consumers) so strong," said economist Paul W. Boltz of T. Rowe Price Associates in Baltimore. "Everything is clicking right. It's just a remarkable time."

Inflation-wary Wall Street nervously anticipated today's Producer Price Index and Thursday's scheduled report on consumer prices in July.

The seesawing Dow Jones average of industrial stocks surged more than 70 points in early trading, temporarily rebounding from a 101-point decline on Tuesday, but was down 6 points by early afternoon.

Bond prices also rose strongly at first but soon gave up the gains. The yield on 30-year Treasury bonds was 6.67 percent, the same as the previous day's close. Prices and yields move in opposite directions.

So far this year, monthly decreases in the Producer Price Index have ranged between 0.1 percent and 0.5 percent, adding up to an annualized deflation rate of 3.1 percent through July.

The longest previous string of price declines since the government began compiling the index in 1947 was five in a row, from August through December 1952.

The Consumer Price Index, which measures the prices of both services and retail goods, has been nearly as well behaved as wholesale prices, rising at just a 1.4 percent annual rate during the first half of the year.

But many economists have been predicting that inflation will creep higher during the second half of the year as economic growth rebounds from a second quarter lull.

In July, prices paid to food producers fell 0.2 percent - the sixth decline in eight months. That offset a tiny 0.1 percent increase in energy prices.

So-called core prices - excluding volatile food and energy costs - declined 0.1 percent, the fourth drop in six months.

Within the finished foods category, egg prices shot up 21.7 percent, the biggest increase in 20 months. Vegetable prices rose 3 percent, including jumps of 138.1 percent in celery and 65.6 percent in cabbage.

However, fruit costs fell 9.7 percent, including declines of 67.8 percent in nectarines and 43.1 percent in peaches. Coffee and beef prices also turned down.

Within energy, an increase in natural gas for residences helped offset a 1 percent drop in gasoline and a decline in fuel oil.

Outside of food and energy, light truck prices fell 0.8 percent. Computers, alcoholic beverages and floor coverings also fell. But the cost of clothing, books and civilian aircraft rose.

Inflation also was absent earlier in the production pipeline. Intermediate prices fell 0.2 percent, the sixth month without an increase, and crude prices edged 0.1 percent lower.

An example of the three processing stages would be clothing for finished, cloth for intermediate and cotton for crude.