WASHINGTON -- The government's latest report on wholesale prices sent mixed signals that left bond market analysts split in their views on whether inflation is picking up.
It also left them waiting for further information of inflation that will come tomorrow when consumer price figures for May are released.
The Labor Department reported Friday that the producer price index in May slipped 0.1% for the second straight month on sharply lower prices for food and energy products. The report also showed that prices were down slightly -- 0.4% -- compared to a year earlier.
However, the closely watched core index, which excludes food and energy, rose 0.4% on price increases in autos, tobacco, women's apparel, and several other types of goods. The size of the increase, and the fact that it came in a number of categories, reinforced the view of some analysts that inflation will rise in the months ahead as the three-year-old upturn in the economy grinds on.
"It's a bit confusing in some ways," said Matthew Alexy, government trading strategist for CS First Boston. "There certainly is a good deal of information contained there, and you can take any bit or piece of it and make of it what you will. But, in general, it just leaves us hanging, waiting for the consumer price data."
The government's consumer price index for May is expected to show a gain of 0.3%, though some analysts suspect it will be higher and rattle the market. "There's a lot riding on that CPI number," said James Coons, chief economist for Huntington National Bank.
As for the PPI, analysts dismissed a 1.9% jump in tobacco prices that appeared to be magnified by seasonal adjustment factors after a decrease in April. But some were disturbed by a 0.8% increased in new car prices, which apparently reflected short supplies at many manufacturers of models that have been in hot demand. "The question is whether we will see that in other areas," Alexy said.
"I'm very satisfied with the report I think it continues to suggest that inflation is moving up modestly," said John Silvia, chief economist for Kemper Financial Services Inc. in Chicago. "It does reflect, especially for autos, that there is demand out there for certain products, and those prices are moving upwards.
Silvia expeclts inflation to edge higher to a range of 3% to 3.5% before the year is over, taking short-term and long-term rates up in the process. "Inflation is creeping up along with the business cycle," he said.
In the last two months, prices of capital goods rose at an annual rate of 5%, and intermediate manufactured goods -- those used in the middle stage of production -- had price increases of 3.5%, said James Annable, chief economist for First National Bank of Chicago.
"Inflation is off the mat and we can see it starting to rise," said Annable, who still views the outlook overall as d unthreatening. "Not tghat many years ago, we would have killed for these numbers."
Other analysts said they remained optimistic that price pressures will not be much of a problem as the economy slows to a more moderate growth pace of about 2.5% in the second half of the year. "That's the key; if we don't get that, we've got a big problem," said Cary Leahey, senior vice president for Lehman Brothers.
Edward Campbell, chief economist for Brown Brothers Harriman, expects that a cooling economy will keep this year's rise in consumer prices to a range of 2.5% to 3%. Next year, he predicts prices are not likely to rise much above 3%. "Right now, the bond looks very cheap given the kind of inflation we're likely to have," he said.