WASHINGTON -- If there is any inflation in the economy, it did not show up yesterday in the government's report on wholesale prices for June.
The Labor Department said its producer price index was fiat last month and unchanged compared with a year earlier. The core rate for PPI, which excludes food and energy, slipped 0.1% to mark the first decline since last October. Compared with a year earlier, the core index was up only 0.6%.
The report was better than expected by bond market economists and highlighted the continuing absence of noticeable price pressures despite repeated predictions that a headstrong economy will boost inflation.
"The message is that inflation is a lot better than markets seem to think it is," said Bruce Steinberg, chief of macroeconomic analysis for Merrill Lynch & Co. "The consistent theme all year in these inflation reports is better than expected. There has been no real inflation pickup in the U.S. economy."
"This is an incredibly good report," said Laurence H. Meyer, president of an economic forecasting firm in St. Louis.
The bond market rallied in initial reaction to the Labor Department figures, which suggested there was less pressure on the Federal Reserve to raise short-term interest rates. Holding off on another rate increase would make it easier for Fed Chairman Alan Greenspan to deliver the Fed's semiannual monetary policy report when he appears next Wednesday before the Senate Banking Committee.
However, the bond market remained jittery yesterday as the dollar skidded once again to new lows in New York trading, hitting 96.70 yen and 1.5195 marks. The weak U.S. currency, combined with worries that the economy is growing too rapidly to suit the Fed's taste given the strong June employment report, left expectations alive that the central bank will have to tighten credit soon.
"We still think there's plenty of momentum, and the case remains to be proved that the economy is going to slow, so the Fed can't afford to take a wait-and-see attitude," said Russell Sheldon, senior economist for Mellon Bank in Pittsburgh.
Analysts said they are waiting to see today's consumer price report, which is considered a better gauge of inflation than the PPI series because it covers a wide range of goods and services. They are also anxious to see the June retail sales report due out Thursday given earlier reports that consumer spending slowed during the spring.
Still, some economists said the PPI report made an eloquent point that inflation fears in the bond market are overblown. Financial markets are overlooking the fact that inflation can hold steady for a long time during a business cycle and typically does not start to rise until the end of an expansion, said Steinberg.
"We're not going to remain inflationless forever," said Steinberg. "But the markets have the timing wrong. It's not coming this year and probably not next year."
Steinberg accepts the Fed's earlier moves this year to tighten credit, but what happens in coming months on rates is a tough call because the economy is showing signs of slowing down, he said. "The markets are demanding more from the Fed, but I'm not sure the economy requires all that much."
Meyer said, "We know we are close to full employment, and there are risks that inflation will move upward over the next year or two, but we're starting at a much lower base than many people appreciate."
He added, "Right now the economy is stabilizing at a very modest inflation rate."
Former Fed governor Wayne Angell, now chief economist for Bear Stearns & Co., has raised eyebrows by calling on the Fed to raise short-term rates a full percentage point to beat down inflation fears in the bond market. Angell is also bullish in his economic forecast, calling for 4.4% growth in the second half of the year.
But Meyer said he expects the Fed to move more cautiously and raise the federal funds rate to 4.50% from the current 4.25% at the Aug. 16 meeting of the Federal Open Market Committee. "The Fed has to be careful about overkill and not listen to people like Wayne Angell," he said.
Unit labor costs and other broadbased measures of inflation are up only modestly in the last year, although wages are likely to increase some as the expansion continues, said Meyer. Still, he said, "There are no cost pressures right now in American industry."
Some figures in the PPI report suggested price pressures are rising slightly from low levels recorded earlier. Prices of goods excluding food and energy rose at an annual rate of 2.5% in the first half of 1994, largely due to higher auto prices. That was up from a 1.3% annual rate in the second half of 1993.
For the first six months of the year, the producer prices rose at an annual rate of 1.6%, up slightly from 1.4% during the second half of last year.