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PPI lessens inflation fears
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July 14, 2000: 11:42 a.m. ET
Core rate declines in June while store sales, industrial production trail targets
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NEW YORK (CNNfn) - Wholesale prices and retail sales rose at a moderate pace in June, government figures indicated Friday, providing further evidence that the U.S. economy is slowing and inflation remains in check.
A separate report indicated that the growth in industrial production also tapered off last month. The one bullish economic report was a University of Michigan survey that measured consumer confidence in July. That index rose more strongly than expected, although it still trails May levels.
Taken together, Friday's numbers continue the recent trend of lessening fears of inflation and future interest rate hikes by the Federal Reserve.
 The Labor Department said its Producer Price Index, a measure of wholesale prices, gained 0.6 percent in June. But the core rate, which excludes often-volatile energy and food prices, showed a 0.1 percent decline for the month.
The core PPI was forecast to have risen 0.1 percent, rather than the decline. Among the items leading the index lower was a 0.5 percent drop in car prices as automakers battled signs of slowing sales, and a 0.7 percent drop for household appliances.
"The details are not as important as the overall message, which is that to the extent that the U.S. economy faces an inflation threat, it is not coming from core goods prices," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.
Markets cheer numbers - at first
The reports initially cheered investors, who interpreted the numbers as a further sign that the Federal Reserve may again decline to raise interest rates when it meets next month. Both equities futures and bond prices gained in morning trading after the report, and U.S. stock markets opened higher, though the Dow Jones industrial average later slipped into negative territory.
The PPI is watched closely for early signs of inflationary pressure, which is the key concern of policy makers at the Fed. If the Fed declines to raise rates in August, it would be the first meeting without a hike since this round of increases started 13 months ago. It also may indicate no rate increases until after the November general election.
The next inflation indicator is the consumer prices index report, due Tuesday. A survey by Briefing.com forecasts that the June CPI gained 0.5 percent, up from the 0.1 percent gain in May. The core CPI, which also excludes energy and food costs, is expected to climb 0.2 percent, the same as in May.
A survey released Friday by the National Association of Business Economics found that about a third U.S. companies raised prices in the second quarter to recoup higher costs, the greatest number in the last five years. And about half the companies surveyed expect further price increases this year.
Stan Shipley, senior economist with Merrill Lynch, told CNNfn's Before Hours program that except for energy prices it looks like the economy is cooling down, and with no inflation and slower growth the Fed probably won't raise interest rates. (356KB WAV) (356KB AIFF)
A 5.1 percent gain in energy prices, led by an 11.8 percent increase at the gas pump, was the key driver of the overall PPI increase. Food prices, the other item excluded from the core PPI measure, slipped 0.3 percent.
The June numbers come after PPI was basically unchanged in May, while the core PPI posted a 0.2 percent increase in that period.
Retail sales advance
Meanwhile, the U.S. Commerce Department reported retail sales gained 0.5 percent in June, but only 0.2 percent when auto sales were excluded.
 A survey by Briefing.com forecast an overall 0.3 percent rise in June, with sales excluding autos climbing 0.4 percent. Retail sales were revised to a 0.3 percent increase in May from the originally reported 0.3 percent decrease, while sales excluding autos were revised to a 0.5 percent gain from unchanged.
Gains in sales at gas stations, due to higher fuel prices, and at grocery stores were offset by weak sales at chain and apparel retailers, Banc of America Securities analyst Steven Wood said.
"While these data will be welcome by the (Fed), two key questions remain," Wood said. "Will the second quarter spending slow down extend through the rest of the year? Economic fundamentals suggest they will. And will the spending slowdown be sufficient to relieve pressure on labor markets and inflation? At this point, that is still an open question."
Industrial production moderates
A third report from the Federal Reserve showed that industrial production rose 0.2 percent in the period, also below the forecast of 0.3 percent and the 0.4 percent gain posted in May.
Capacity utilization at the nation's factories came in at 82.1 percent, the same as the forecast and the rate of use in May.
The University of Michigan measure of consumer sentiment rose to 108.0, above the 106.8 forecast and the 106.4 level posted in June. But the index still is below the 110.7 level reached in May.
"Households' economic attitudes have declined modestly over the last six months," Banc of America's Wood said. "But the level suggests consumers remain very optimistic about their personal financial condition." 
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