Wholesale Prices Inch Up in July Amid Mild Energy Costs

WASHINGTON – Wholesale prices nudged up by just 0.1 percent in July, restrained by falling costs for food products and a moderation in energy prices.

The tiny increase in the Producer Price Index (search), which measures prices before they reach store shelves, came after wholesale prices jumped by 0.5 percent in June, the Labor Department (search) reported Thursday. June's rise mostly reflected sharply higher costs for energy products, which have eased a bit since then.

The performance of the PPI in July matched economists' expectations. The report may ease -- but not eliminate -- the Federal Reserve (search) 's fears about the remote threat that already low inflation could keep moving lower and turn into deflation, an economically dangerous slide in prices.

Amid signs of an economic revival, Fed Chairman Alan Greenspan and his colleagues decided Tuesday to leave a key short-term interest rate at a 45-year low of 1 percent and hinted it may stay there for some time.

With the Fed more concerned about inflation going down, rather than up, the central bank has leeway to hold the funds rate at low levels for a while even if the economy picks up speed in the second half of this year, economists said.

The Fed has said repeatedly that it must be on guard against even a remote threat of deflation, because of its potential to wreck the economy.

"The probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level," the central bank said Tuesday.

Thursday's PPI report showed that excluding food and energy prices, which can swing widely from month to month, "core" wholesale prices rose by 0.2 percent in July, compared with a 0.1 percent decline in June. Rising prices for cars, light trucks and pharmaceutical preparations contributed to the increase in core prices in July.

Energy prices in July increased by a moderate 0.3 percent, down from a 3.4 percent jump in June. In July falling prices for liquefied petroleum gas, such as propane, and residential electric power blunted rising prices for gasoline and home heating oil.

Food prices declined by 0.2 percent in July, compared with a 0.4 percent rise in June. Beef and veal prices -- which have been rising -- dropped by 5.6 percent, the largest decline since April 1995. Prices for pork and vegetables also went down.

The current economic climate makes it difficult for producers to raise prices, which is a benefit for consumers, but can squeeze producers' profit margins.

Economists believe the economy will gain traction in the second half of this year, with some estimating economic growth clocking in at an annual rate of 3.5 percent or 4 percent or more. Businesses want profits to improve and want to be sure the recovery is vigorous before they step up capital investment and hiring, economists said. Those are two key ingredients for the economy to get back to full throttle.