Originally created 09/12/98

Producer prices drop largest since January



WASHINGTON -- Prices charged by producers such as factories and farms fell 0.4 percent in August, pulled down by deflation in gasoline, automobiles and vegetables.

The seasonally adjusted decline in the Producer Price Index, reported today by the Labor Department, was the largest since January and exceeded analysts' expectation for a slight 0.1 percent drop.

"Inflation is dead and deflationary pressures intensify," said economist Cheryl R. Katz of Merrill Lynch.

World economic turmoil -- by sapping global demand for manufactured goods and commodities -- is putting pressure on producers but benefiting buyers through lower prices.

The presence of deflation for many goods could give the Federal Reserve leeway to reduce short-term interest rates later this year to offset the negative impact of the global crisis.

The stock market, which has been on a roller-coaster ride in recent weeks, shot up more than 115 points, as measured by the Dow Jones industrial average, in early trading today. But by early afternoon the gain had faded to 75 points.

For the first eight months of the year, producer prices have fallen at a 1.4 percent annual rate, compared with a 1.2 percent decrease for all of 1997.

Much of the decline has come in energy costs, down 2.3 percent in August and at a 14.8 percent annual rate so far this year. But food costs also have fallen, 0.4 percent last month and at an 0.3 percent rate so far this year.

Separately, the Agriculture Department said today that forecasts for large corn, soybean and wheat crops will continue to push farm prices down sharply as the fall harvest gets started. The worst price slide is expected in soybeans.

And the Labor Department said "core" producer-price inflation -- which excludes the volatile food and energy components -- has been contained. Those prices edged 0.1 percent lower in August and, for the first eight months of the year, have risen at just a 1.2 percent annual rate.

August's price drop was propelled by an 8.5 percent decline in gasoline -- the largest for a single month since 1991. That brought the price 30.1 percent lower than a year ago. The cost of home-heating oil and residential electricity also fell, but natural gas costs rose 1 percent.

Food prices fell 0.4 percent in August, with vegetable costs plunging 20.6 percent. The cost of both tomatoes and onions was cut nearly in half. Fruit, however, cost 1.7 percent more, pulled up by an 80 percent increase for blueberries.

Passenger car prices declined 1.7 percent in August with General Motors production returning following a nearly two-month strike. Computer prices continued to drop, 4.5 percent last month.

After a series of sharp increases, prescription drug costs fell 0.6 percent, but were still 21.3 percent higher than a year ago.

Tobacco increased 2.8 percent, and was 15.6 percent above a year earlier, as companies continue their push to recover the cost of multimillion-dollar liability lawsuits over smoking-related deaths.

Children's clothing shot up 5.2 percent, rebounding from a 4.5 percent drop the month before. But women's and men's clothing slipped 0.1 percent.

Earlier in the production process, prices fell 0.3 percent for intermediate goods and 2.7 percent for crude goods. An example of the three processing stages is bread for finished, flour for intermediate and wheat for crude.