By Jeannine Aversa
Associated Press Writer
WASHINGTON — Wholesale prices in January took their biggest leap in a decade, even as industrial production fell for a fourth month in a row. Natural gas prices soared at a record pace.
Analysts said the figures portrayed an economy that was struggling but not in recession. Inflation has eased recently, they said, and a third report yesterday showed housing construction flourishing.
The reports come as Federal Reserve Chairman Alan Greenspan and his colleagues seek to stave off an economic downturn. The Federal Reserve slashed interest rates by a full percentage point in January, the first time the central bank has moved so quickly during Greenspan's 14-year tenure.
While yesterday's mixed economic news could complicate matters a bit for them, economists continue to believe Fed policy-makers will move to cut interest rates again next month.
"When you add it all together, there is still a bright green light for the Federal Reserve to ease monetary policy,'' said Mark Zandi, chief economist for Economy.com.
But on Wall Street, the inflation report rattled investors who thought it might diminish the chances of further rate decreases. The Dow Jones industrial average fell 91.20 points to close at 10,799.82. Bad news from the tech sector and military action in the Mideast added to the market's woes.
Economists rejected the notion that the economy might be coming to face the twin evils of high inflation and sluggish growth. That's because many analysts believed yesterday's Producer Price Index report by the Labor Department painted a picture of wholesale inflation that isn't as bad as it seems.
The PPI, which measures inflation pressures before they reach store shelves, shot up 1.1 percent in January, the largest rise since September 1990. That followed a mild 0.2 percent increase in December.
"While the raw producer price numbers seem a bit scary, a closer look shows that the spike in prices was isolated mainly to energy, tobacco and autos,'' said Jerry Jasinowski, president of the National Association of Manufacturers. Excluding those increases, wholesale prices rose by a modest 0.3 percent, he said.
Although natural gas prices rose sharply in January, they have since moderated, boding for more tame inflation figures in February, economists said.
The PPI report said the price of natural gas to heat homes and for other residential uses rose by a record 11.3 percent in January, surpassing the previous high set in December. Costs of natural gas to power electric utilities and used in industrial production also registered record increases of 64.4 percent and 46 percent, respectively.
Wholesale natural gas prices soared to $10 per million British thermal units in January, but have since eased. Gas prices at key trading centers this week ranged from $5.88 to $6.41 per million Btu, according to the Energy Information Administration.
Higher cigarette and car prices largely accounted for a 0.7 percent rise in "core'' wholesale inflation, which excludes food and energy.
Cigarette prices rose 6.3 percent in January, the largest increase in 11 months, as companies raised wholesale prices to cover legal costs, something economists didn't believe would be ongoing.
Car prices increased 1.2 percent, the highest since October 1999, but economists largely believed that reflected difficulties adjusting prices for seasonal factors. Many car makers and dealers have actually been cutting prices and offering incentives to get rid of inventories that piled up because of flagging demand, said Paul Taylor, chief economist for the National Automobile Dealers Association.
In another report, the Federal Reserve said industrial production fell by 0.3 percent in January. That reflected a sharp decline in output at gas and electric utilities due to better weather as well as a big drop in the production of cars and auto parts.
Operating capacity at factories, utilities and mines, meanwhile, declined to 80.2 percent last month, the lowest since August 1992, as companies cut back due to weaker demand.
The manufacturing sector has been bearing the brunt of the economic slowdown. While industrial output has fallen for four months in a row, January's performance marked an improvement over December's steep 0.5 percent decline. That heartened some economists.
"The manufacturing sector is starting to stabilize and that should put a floor under the slowdown,'' said economist Joel Naroff of Naroff Economic Advisors.
One area of the economy that has held up well has been the housing sector, illustrated in another report yesterday from the Commerce Department showing that new housing construction rose by 5.3 percent in January to a seasonally adjusted annual rate of 1.65 million units.
When the government releases information next week on consumer prices, analysts believe they will be more tame than the wholesale prices. Economists said companies, already faced with dampened demand, wouldn't seek to raise retail prices and would pay for higher energy costs by reducing profits.
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