Posted on: Friday, May 14, 2004

Wholesale prices show 0.7% spike

By Jonathan Weisman
Washington Post

WASHINGTON — Wholesale prices leaped an unexpected 0.7 percent in April, while sales slowed at U.S. retailers, the government said yesterday in separate reports that added fuel to fears of inflation and rising interest rates.

As if on cue, mortgage financier Freddie Mac reported that the average interest rate on 30-year mortgages rose for the eighth straight week, to an eight-month high of 6.34 percent. Then oil and gasoline prices closed at record highs.

Soaring gasoline costs affected both the jump in prices paid by goods producers and sagging retail sales last month, economists said.

Excluding volatile food and energy prices, wholesale costs rose 0.2 percent, about what economists had forecast. But the price that manufacturers pay for partially finished goods rose by 1.1 percent, the biggest one-month gain since January 1995, according to Goldman Sachs economists. That may suggest that the sharp spike in raw material costs that appeared in January is working its way through manufacturers and ultimately will reach consumers.

Some economists cautioned that the news on wholesale prices may have only limited impact on Federal Reserve policymakers as they consider raising short-term interest rates. Competition and rising worker productivity may persuade firms to absorb the costs of rising wholesale prices instead of passing them on to consumers.

Indeed, on Tuesday, Anthony Santomero, president of the Federal Reserve Bank of Philadelphia, said he is "wary" of the argument that rising global demand for commodities will drive consumer prices higher in the United States.

"For commodity prices to increase the rate of inflation on a sustained basis, they would have to rise continuously and represent a significant component of the total cost of final goods and services," Santomero said in a New York speech. "In fact, commodity price pressure is rarely sustained and often reversed, and commodities represent a relatively small share of final product costs."

The one bright spot was in construction, the economic sector that has helped keep the economy afloat for three years. Building materials and garden equipment sales fell just 0.7 percent, far less than expected after a huge 11 percent gain in March.