Inflation Tapers Off, but Retail Sales Soar

Inflation at the wholesale level tapered off in May after rising sharply the month before. Still-confident Americans, meanwhile, kept buying everything from clothes to cars--raising the likelihood of a Federal Reserve interest rate increase soon.

The producer price index, which measures inflation pressures before they reach the consumer, rose just 0.2% last month, reflecting a drop in gasoline prices, which posted a record increase the month before, the Labor Department said Friday. Wholesale prices in April had jumped 0.5%.

A separate report by the Commerce Department said retail sales rose by a hefty 1% last month, led by a sharp 2.5% increase in auto purchases. Retail sales have climbed or held steady for 10 months running and were 7.8% higher in May than the same month last year.

“The American consumer appears to have an insatiable appetite,’ said Oscar Gonzalez, an economist with John Hancock.

What’s more, the University of Michigan’s consumer sentiment index rose to 109 this month from 106.8 in May, preliminary data showed. That could herald even higher spending.

But the latest data is almost certain to worry the Fed, which is concerned that the economy is growing too quickly, threatening a buildup of inflationary pressures.

“There’s lots of momentum in retail sales,” said economist Tim O’Neill with Harris Bank. “If you are worried about the inflation speedometer, then you’ll need to slow down consumer gas, which fuels the economic engine, and that would happen by the Fed raising interest rates.”

Cynthia Latta, an economist with DRI/McGraw Hill, said other factors the Fed may use to justify a rate increase were reports this week that struggling overseas economies, including Japan’s, may be gaining strength, which could push up global price pressures.

The moderation in wholesale prices in May reflected a big drop in energy prices. Gasoline prices at the wholesale level, which had risen by a record 29.1% in April, dropped 2.7% last month.

That moderation is expected to show up in retail prices. Many analysts are forecasting an increase of around 0.2% in the May consumer price index, which will be released next Wednesday, down from a nine-year high of 0.7% in April.

At the wholesale level, food prices last month rose 0.5% after a big 0.9% drop in April. The May increase included a surge in pork prices. Fruit prices were also up sharply, with big gains for grapefruit, lemons and pears.

Excluding the volatile food and energy sectors, prices at the wholesale level rose a tiny 0.1% in May, matching the April increase.

So far this year, the so-called core rate of inflation at the wholesale level has been flat, an even better performance than the 1.9% rate of increase in the first five months of 1998.