updated 7/15/2004 8:46:58 AM ET 2004-07-15T12:46:58

Wholesale prices fell by 0.3 percent in June, the biggest decline in a year, as energy and food costs retreated. The report underscored Federal Reserve policy-makers’ belief that inflation isn’t currently a threat to the economic recovery.

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The unexpected over-the-month drop in the Producer Price Index, which measures the prices of goods before they reach store shelves, comes after wholesale costs shot up in the prior two months. It reflected sharply higher prices for energy and food, the Labor Department reported Thursday. Wholesale prices rose by 0.7 percent in April and by 0.8 percent in May.

The latest reading on the PPI surprised economists, who were forecasting a 0.2 percent rise in wholesale prices in June.

In other economic news, new claims for unemployment benefits jumped last week by a seasonally adjusted 40,000 to 349,000, the Labor Department said in a second report. In the prior week, claims plunged by 40,000.

A portion of last week’s increase was due to layoffs associated with temporary shutdowns at automobile plants to retool for new models, a department analyst said.

Those temporary shutdowns occur around the same time each year, and they make the jobless claims numbers especially volatile. Such wide swings in applications for benefits also make it difficult for economists to divine their significance in terms of analyzing the health of the labor market.

The Commerce Department also reported Thursday that businesses boosted inventories by 0.4 percent in May and their sales rose by 0.7 percent — an encouraging sign that companies are increasing investment.

On the inflation front, “core” wholesale prices — which exclude volatile energy and food prices — rose by a modest 0.2 percent in June, down from a 0.3 percent advance in May. The increase in core prices matched economists’ expectations.

Federal Reserve Chairman Alan Greenspan and his colleagues at their June meeting said they were holding to the view that inflation currently doesn’t pose a problem to the economy and that short-term interest rates can be moved up gradually. But if inflation shows signs of becoming a problem, the Fed said it will take more aggressive action “to fulfill its obligation to maintain price stability.”

Fed policy-makers at that June 30 meeting boosted interest rates for the first time in four years in an effort to make sure the expanding economy doesn’t ignite an unwelcome rise in inflation. The Fed increased a key rate to 1.25 percent, from a 46-year low of 1 percent.

“Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors,” the Fed said at the time. Policy-makers said they expected underlying inflation “to be relatively low.”

Energy prices, after soaring by 1.6 percent in both April and May, declined by 1.6 percent in June, the wholesale price report showed. Gasoline prices, while higher than a year ago, dropped by 5.2 in June. Residential electric power prices declined by a record 2.9 percent, surpassing the previous record one-month drop of 1.3 percent registered in September 1995. Residential natural gas prices, however, rose by 3.1 percent in June.

Food prices, which rose by a sharp 1.4 percent in April and 1.5 percent in May, declined by 0.6 percent in June. Rising food prices in part reflected higher transportation costs due to more expensive fuel. Easing energy prices helped to calm down food costs in June.

Falling prices for vegetables, fruits and dairy products offset rising prices for beef and veal and soft drinks.

The 0.3 percent drop in overall wholesale prices in June was the largest since a 0.4 percent decline in May 2003. It marked the first decrease since November, when prices slipped down by 0.1 percent.

Even with the decline in wholesale prices in June, these prices have been on the rise this year.

In the first six months of this year, wholesale prices have gone up at a seasonally adjusted annual rate of 5 percent, compared with a 3 percent pace for the same period last year. Core prices, meanwhile, have increased at a 2.5 percent rate so far this year, compared with a 1.2 percent rise for the corresponding period last year.

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