WHOLESALE prices fall by record amount in October, led by big drop in energy costs

Friday, November 9th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ Prices at the wholesale level plunged 1.6 percent in October, the biggest one-month drop in 54 years of record-keeping, as gasoline and energy prices fell by the largest amount in 12 years, the government said Friday.

The decline in the Labor Department's Producer Price Index, which measures cost pressures before they reach consumers, was the third this year and followed 0.4 percent increases in both September and August.

Analysts had been expecting wholesale inflation to retreat in October, given the big declines in energy prices, but the drop of 1.6 percent was four times what had been forecast.

It was the biggest one-month plunge since the government began monitoring wholesale inflation in 1947, exceeding the previous record of a 1.3 percent drop in February 1986.

So far this year, inflation at the wholesale level has actually been declining at an annual rate of 0.8 percent, a sharp turnaround from the 3.6 percent increase in wholesale prices that occurred last year.

Inflation at the consumer level has also been lower than last year but not as well-controlled as wholesale prices. Consumer prices through September were rising at an annual rate of 2.8 percent, down from an increase for all of 2000 of 3.4 percent.

Given the extremely good report on wholesale prices for October, analysts are likely to revise downward their expectations for the performance of consumer prices for the month. That report will be released on Nov. 16.

The big drop in inflation in October reflected a turnaround in energy costs, which shot up immediately after the Sept. 11 terrorist attacks on fears that America's war in Afghanistan could disrupt the flow of oil from the Middle East.

However, those concerns have fallen away as oil flows have continued unabated. Economists now predict prices of oil and other products will continue to be well-contained given falling demand, a result of the weakening U.S. economy.

With the widespread view that the country has entered its first recession in a decade, analysts are predicting that inflation pressures, which have been moderating for a year, will retreat further, especially in the area of wage pressures, as the surging unemployment rate dampens workers' demands for salary increases.

Declining inflation pressures will give the Federal Reserve more room to cut interest rates in an effort to get the country out of its current slump. The Fed cut rates for a 10th time Tuesday and many economists expect an 11th rate reduction when the central bank meets for the last time this year on Dec. 11.

For October, energy prices dropped by 7.7 percent, the biggest decrease since a 7.8 percent fall in August 1989. The decline reflected a huge 21.2 percent fall in gasoline prices, the biggest since a 22.1 percent drop in March 1986.

Surveys show that prices are falling even more in early November as the weak economy shaves demand and supplies rise. With many Americans cutting back on their travel plans, the price of a gallon of gasoline is down by about 30 cents from a year ago at $1.24 and has fallen below $1 per gallon in some parts of the country.

The PPI report showed that natural gas prices, which had soared because of short supplies last winter, fell by a record 6 percent in October. Analysts are predicting that natural gas will be about one-third cheaper this winter than last, good news for the 55 percent of American homes that heat with natural gas.

Home-heating oil prices also fell dramatically, dropping 20.9 percent, the biggest decline since February 1990, when the country was in the depths of the last recession.

The Labor Department said food prices were also down last month at the wholesale level, dropping 0.4 percent with widespread declines in most food groups, led by a 11.4 percent drop in the price of vegetables.

Inflation at the wholesale level excluding the volatile energy and food sectors was also down, by 0.5 percent. It was the biggest decline in the ``core'' rate of inflation since a 1.2 percent plunge in August 1993.

This decline was helped by a 4.7 percent fall in the price of new cars, the biggest drop since a record 5.2 percent decrease in October 1972.