Wholesale prices drop in May for second straight month as cost of energy and food both decline

WASHINGTON (AP) — Wholesale prices fell for a second straight month in May, the first time that has happened in a year, reflecting big declines in the cost of energy and food.

The Labor Department said Wednesday that wholesale prices dropped 0.3 percent in May following a 0.1 percent decline in April. Core inflation, which excludes energy and food, rose 0.2 percent. Core prices are up just 1.3 percent over the past 12 months.

The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.

Many economists believe the Fed will not start raising rates until sometime next year, believing that the severe recession of 2007-2008 will keep inflation a no-show for the rest of this year.

"A still-considerable amount of excess capacity in the economy will keep price pressures modest," predicted Jennifer Lee, senior economist at BMO Capital Markets.

Paul Ashworth, senior U.S. economist at Capital Economics, said that upcoming inflation reports should show continued price moderation, reflecting the big declines occurring in gasoline and other energy prices.

Ashworth said even with the price declines there was no danger that the country would topple into a period of sustained deflation, something not seen in the United States since the Great Depression of the 1930s.

In May, energy prices fell 1.5 percent, the biggest drop since a 2.2 percent decline in February. Gasoline prices were down 7 percent while home heating oil fell 7.4 percent and residential natural gas was down 1.1 percent.

The lower prices reflect a continued decline in global oil prices which have been falling because of concerns that the European debt crisis will dampen growth prospects in a key region of the world.

Falling energy costs are expected to keep inflation low in June as well, given that gasoline costs in June are down significantly from a month ago. The nationwide average for regular gasoline is $2.70 currently, down from $2.87 a month ago, according to AAA's Daily Fuel Gauge Report.

Food costs dropped 0.6 percent, the biggest decline since a 1.3 percent fall in July of last year. The decreases were led by an 18 percent drop in the cost of fresh vegetables, a category where prices had been driven higher because of damaging freezes earlier in the year in Florida.

The 0.3 percent drop in the overall inflation rate for Labor's Producer Price Index was slightly less than the 0.5 percent decline economists had expected while the 0.2 percent rise in core inflation compared to a forecast 0.1 percent increase.

Core prices were driven up in May by a 2.5 percent increase in the price of cigarettes, the biggest gain since last November. The cost of light trucks, a category that includes sport utility vehicles, rose 0.8 percent, the biggest increase since a 1.9 percent rise in January, and a 0.4 percent increase in the price of airplanes.

The PPI measures inflation pressures before they reach the consumer. Economists are also anticipating tame inflation at the consumer level as well.

Economists surveyed by Thomson Reuters forecast that overall inflation at the retail level will decline 0.2 percent when that report is issued Thursday. Core inflation, excluding energy and food, is expected to post a 0.1 percent increase. That would mean core consumer inflation is up 0.9 percent over the past year, below the Federal Reserve's target for inflation.

The absence of core inflationary pressures has given the Fed room to cut a key interest rate to a record low of 0.00 to 0.25 percent, helping to promote borrowing as the economy emerges from the worst recession in decades.

The severe downturn forced more than 8 million workers out of jobs and put a lid on salary increases. Also businesses have found it hard to boost prices in the face of slack demand.