WASHINGTON - An unexpected drop yesterday in the government's producer price index for April served notice again that inflationary pressures remain well contained.
The Labor Department said that producer prices slipped 0.1% last month as food and energy costs both eased, continuing a string of encouraging reports showing hardly any change in inflation at the wholesale level. Compared to a year earlier, April prices were actually down 0.4%. Excluding food and energy, they were up a scant 0.1%.
"The inflation story just continues to hold," said David Greenlaw, an economist with Morgan Stanley & Co. "There's no indication of inflationary pressures building. It's just a very favorable report."
Analysts nonetheless continue to expect that officials will again tighten credit at next Tuesday's meeting of the Federal Open Market Committee by raising the current federal funds rate of 3.75% to 4% or 4.25%. There is also talk that policymakers will announce an increase in the discount rate, now 3%, as a public signal of their commitment to fighting inflation.
Fed officials have signaled that they wish to raise interest rates to keep the economy from overheating and creating price pressures in the future, beginning sometime next year.
"I'm an inflation bull. There's nothing in the data that suggests producer prices are accelerating," said Lincoln Anderson, chief economist for Fidelity Investments in Boston. Import prices are actually down, forcing U.S companies to keep their prices competitive, and labor costs for businesses are being kept in check, Anderson said.
Analysts said they were encouraged not only by the unexpected downturn in producer prices at the finished goods level - the bond market had been expecting a small gain - but by signs that earlier price pressures in the pipeline had disappeared.
The Labor Department's index for prices of crude goods excluding food and energy in April slipped 0.3% after hefty increases during the preceding six months. In addition, the intermediate price index excluding food and energy rose a modest 0.2%. Both indexes measure prices paid for oil and other goods before they become finished products such as newspapers, computers, or food and are sold to consumers.
Other movement reports issued yesterday also turned out to be weaker than expected, helping to fuel a rally in the bond market.
The Commerce Department said retail sales in April tumbled 0.8% on widespread declines in consumer purchases of autos and other durable goods. However, the department also issued sharply revised figures for March showing that sales surged 1.7% instead of the 0.4% gain originally reported. And February sales were revised up to 1.8% from the 1.6% rise last reported.
Some analysts suggested that the drop in April sales suggested consumers were beginning to cut back on spending. Lacy Hunt, chief economist for HSB Securities, Inc., said he believes this year's tax increases were beginning to bite.
However, other analysts said they believe consumer spending remains strong and will keep fueling solid economic growth. Many are estimating that second-quarter gross domestic product will increase in a range of 3% to 4% , with some estimates as high as 6%.
Commerce Secretary Ronald Brown said in a statement that with the revisions to the February and March figures, retail sales so far this year were up at an annual rate of 4.5%. Brown also hailed the producer price report and said the Clinton Administration remains confident of its forecast for "moderate growth and contained inflation."
Meanwhile, the Labor Department reported that initial claims for unemployment benefits in the week ending May 7 rose 26,000 to 378,000. The four-week moving average preferred by economists increased 7,000 to 351,0000, which was the fourth straight weekly advance. Economists said they were puzzled by the figures because they did not fit with the April employment report showing that the civilian jobless rate fell to 6.3% from 6.4%.
