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Date: Wed, 11 Nov 92 12:52:31 EST
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11/11/92


TITLE #m#ak#m##m#hed to come#m##m#tlj#m#Inflation Weaker Than Ex-
pected In October

Tiny 0.1% Producer Price Gain Leaves Fed Room To Ease Kathleen
Hays In New York Wholesale prices rose a scant 0.1% in October,
and along with declining gold and commodity prices left little
doubt that disinflation continues to hold sway in the nation's
sluggish domestic economy.

Last month's meager advance in the producer price index, a meas-
ure of inflationary pressures at the business rather than consu-
mer level, was the best showing since an equally small 0.1% gain
in August, the Labor Department noted yesterday.  In September,
the PPI increased 0.3%, boosted mainly by rising auto and tobacco
costs. But last month a large drop in car prices that helped pull
capital equipment prices lower offset hefty gains in gas, fruit,
and vegetable prices. The PPI was flat in July.  Excluding food
and energy prices, the so-called core PPI inflation rate actually
fell 0.1% last month, posting its third decline of the past five
months.  Measured over the past 12 months, producer prices gained
at a modest 1.6% annual rate, higher than the 0.1% decline of
1991 when plunging oil prices pulled the overall index lower but
good news on the inflation front nonetheless.  The closely
watched core PPI rate, considered a truer measure of underlying
inflation pressures, has risen at a mere 1.8% rate over the past
year, down considerably from 1991's 3% increase. Measured over
the past six months, the core PPI has advanced at a subdued 0.6%
pace.  In addition, gold prices, still considered by some to be
one of the best barometers of future inflation, have fallen shar-
ply this week in tandem with other metals prices like copper,
silver and platinum.  With metals prices on the decline, the Com-
modity Research Bureau's index of 25 commodity futures prices and
the


Inflation Weaker Than Expected In October


Journal of Commerce's commodity price index - two important inf-
lation gauges - are nearing their recent lows.  The U.S. govern-
ment bond market at long last showed signs of acknowledging the
reality that disinflation is the now the order of the day. The
price of the bellwether 30-year issue gained nearly 3/4 of a
point, pulling the yield down to 7.67%.

But economists stressed that given the benign inflation outlook,
bond yields remain far too high. Some find a possible explanation
for these lofty levels in lingering fears of the Clinton
administration's fiscal stimulus plans.  "All in all, we see
disinflation whether it's in the wholesale or retail environment,
or in the commodity prices themselves, but we have yet to see
that fully factored into the fixed-income market," said Kevin
Flanagan, vice president and money market economist at Dean
Witter Reynolds Inc. "It looks like they still have Clintonitis."

He added: "Inflation is low, the economy is sluggish . . . but we
have not yet seen a big rally for fear of what Clinton will do in
the first 100 days of his administration and what they may do to
increase the budget deficit." Inflation fell steadily during the
1980s while the federal budget deficit ballooned. But that does
not stop long-term investors from worrying that eventually a
growing supply of dollar-denominated IOU's floating around the
world will overwhelm appetite for U.S. debt instruments - even if
inflation does remain under control.  Donald Ratajczak, head of
the Georgia State University Economic Forecasting Center and an
inflation expert, observed that even though "what we have been
observing over the past three or four months is a slowing in the
underlying inflation rate, this is the opposite of what the bond
market appears to think." "With inflation falling domestically,
excess capacity here and abroad, and with Europe in recession, we
see that manufacturers' typical seasonal price increases are be-
ing pared back," he said.

Car prices, for example, rose last month, but the increase was so
small compared with the usual hike that after statistical season-
al adjustment it showed up as a steep 2.3% decline, the Labor
Department noted.

With auto costs ebbing and computer prices falling once again,
capital equipment prices dropped 0.2% after being unchanged in
September and edging up just 0.1% in August.  Energy prices were
the big booster on the producer price side in October, leaping
1.4% to post their biggest advance since a 2.5% jump in June. In
September they increased 0.8% and in August edged down by 0.1%.
Gasoline costs surged 3.3% last month, with electricity up 1.2%
and natural gas up 2%.  Consumer foods prices rose 0.1% in Oc-
tober, after gaining 0.4% the previous month. Vegetable prices
jumped 27%, pushed by surging prices in several categories: snap-
beans up 166.5%, Irish potatoes up 121.1%, cucumbers up 119.5%,
and sweet corn up 111.8%.  Fruit prices rose 8.9% in October,
while fish prices dropped 10.5% for their biggest one-month de-
cline ever.  The various changes left the PPI at 124.3 in Oc-
tober.  While there is no direct correlation between wholesale
and retail prices, economists reckon that about 25% of producer-
price changes feed through to consumer prices, of which roughly
70% are determined by labor costs. Economists expect a moderate
0.2% to 0.3% increase in October consumer prices, set for release
this Friday, which would keep the yearly rate of increase at
around 3%.  Recently, Federal Reserve officials have been among
the more optimistic in their inflation forecasts for 1993 - a
year when many investors fear that the incoming Democratic ad-
ministration will pull out its big fiscal guns and let loose a
growth-accelerating, inflation-rekindling fury.  On Monday,
Robert Parry, president of the San Franciso Federal Reserve,
predicted that the underlying, core CPI inflation rate would come
in at 3% in 1992, down from 4.5% in 1991, and would drop to 2.5%
next year.

The Fed's successes in reining in inflation "is important because
it gives us greater latitude to respond to weakness in the econo-
my if it's necessary," he told a convention of savings and loan
executives in San Diego.  Right now, however, economists are
sharply divided over whether the Fed will cut short-term interest
rates again to stimulate the economy. Some, worried about the
fragility of the nascent recovery, fear that the U.S. central
bankers will forego credit easing in expectation of a fiscal
stimulus package to be passed in 1993, leaving the economy to
struggle on its own for the next several months.  David Goldman,
chief economist at the supply-side consulting firm Polyconomics
in Morristown, N.J., said the sudden drop in gold prices is a
warning sign that the Fed's policy is too tight.  "I think the
Fed is being dangerously deflationary," he said.  He said that if
the weakness in gold prices persists, this will spur the Fed to
cut the federal funds rate - an overnight bank lending rate now
targeted at 3% - by 0.25 percentage point.  Lawrence A. Kudlow,
chief economist at Bear, Stearns & Co., said he thinks that the
drop in gold and other precious metals prices is in part a
response to a possible trade war between the U.S. and Europe,
which would be a big potential drag on the domestic economy.
Nevertheless, if the gold and other commodity prices continue to
dip lower, he too predicted the Fed would cut short-term interest
rates a notch.  "Deflation in Europe could become a typhoon that
would sweep over the U.S. and the Fed would be justified in
responding to that," he said.  This article is copyright 1992
Investors Business Daily. Redistribution to other sites is not
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