WASHINGTON -- A big drop in the government's wholesale price index for September yesterday put to rest worries that Federal Reserve officials will tighten credit again before the midterm elections.
Analysts said they are confident any increase in short-term interest rates will not come until the Nov. 15 meeting of the Federal Open Market Committee. Still, many economists continued to insist that inflationary pressures are in the pipeline and that Fed officials will raise rates to 5.25% from 4.75%.
Their comments came after the Labor Department reported that the producer price index tumbled 0.5%, the biggest monthly downturn since August 1993. The drop followed plump increases of 0.5% in July and 0.6% in August that stirred bond market fears of accelerating inflation.
Falling gasoline prices contributed to the decline, as did a large drop in new auto prices as-dealers offered discounts to clear out end-of-the-year models. Prices of computers and other capital equipment hardly budged for the third straight month.
Compared with a year earlier, producer prices were up only 1.4%. Excluding food and energy, the core rate for the index was up only 0.1%, and 1.9% from a year earlier.
"We're stunned here," said Chris Rupke, an economist with Mitsubishi Bank. "Inflation is not picking up. I can't figure it out. Maybe the last recession and slow economic recovery just kicked out a lot of inflation, and it's hard to get it going again."
The bond market was clearly relieved by the report, pushing the yield on the Treasury's 30-year bond sharply lower. In late afternoon trading, the long bond was quoted at 7.84%.
The market ignored a separate report from the Labor Department indicating that labor markets are continuing to strengthen. Unemployment insurance claims fell again in the week ending Oct. 8, and the four-week moving average slipped to 315,250, the lowest level since May 1989.
A fresh batch of statistics is due to be released today, including the Fed's industrial production index for September. Analysts will also be paying close attention to the consumer price report, a broader and more reliable inflation gauge than the PPI.
But unless those figures are widely different from expectations, Fed officials are expected to stay on the sidelines until they see fresh economic statistics for October that will not become available until early next month. The next employment report is due Nov. 4, two days after the elections.
Assuming the Fed does stay out of the picture until next month, President Clinton won't be troubled by any jolt to public sentiment from higher rates as he campaigns to retain Democratic control of Congress. Fed officials themselves, and their policy of acting pre-emptively to fight inflation, would also be shielded from controversy.
Still, analysts said they saw signs of rising price pressures buried in the details of the PPI report. The core rate of inflation for crude goods, items that have not .been processed at all such as cotton and scrap iron, jumped 1.3% and were up 13.7% from a year earlier. Prices of core items in the intermediate goods category rose 0.6%, and 3.5% from a year earlier.
Many economists continue to believe that because the economy is still strong and operating at close to full capacity, an upturn in inflation is all but inevitable. Fed officials themselves have acknowledged that the economy is running on all cylinders and have noted scattered signs of labor shortages.
"In terms of economic theory, we have all the ingredients for higher inflation -- underlying strong demand and shrinking capacity," said Paul Kasriel, an economist for Northern Trust Co. "Maybe it will be different this time, but I wouldn't bet that."
Analysts said the big surprise in the September price index was a 1.1% plunge in prices of new cars, and some called it a fluke. "I don't think anyone in their right mind believes it," said Leonard Santow, managing director of Griggs & Santow Inc.
Santow said dealers were apparently dumping cars to clear space for the new 1995 models, which are on back order in response to strong demand. But manufacturers have announced price increases for the new models, and Japanese automakers are being forced to raise prices because of the strong yen.
Kasriel noted that the drop in the overall index was concentrated in a few big items such as energy and cars. Most items went up in price and have been going up since June, he said.
