msnbc.com news services
updated 6/14/2005 11:27:55 AM ET 2005-06-14T15:27:55

U.S. wholesale prices plunged 0.6 percent in May, the biggest decline in more than two years, although the apparent lack of inflation pressure failed to encourage American consumers, as retail sales fell for the first time in nine months.

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The Labor Department reported Tuesday that the decline in its Producer Price Index followed gains of 0.6 percent in April and 0.7 percent in March, hefty increases which had raised worries that inflation was threatening to break out of the moderate pattern of the past several years.

Three-fourths of the May decline reflected a big 3.5 percent drop in energy prices after three months of sizable gains in this area. But prices were contained in other areas as well with so-called “core” inflation, excluding energy and food. That number rose by just 0.1 percent in May, down from a 0.3 percent jump in April.

In other economic news, the Commerce Department reported that retail sales fell by 0.5 percent in May. The drop, which followed a huge 1.5 percent increase in April, reflected a decrease in auto sales and lower prices for gasoline.

Last week, Federal Reserve Chairman Alan Greenspan said the economy, despite being buffeted by a spike in energy prices earlier this year, seemed to be on “reasonably firm footing” with inflation remaining under control.

Greenspan’s assessment has bolstered the belief that the Fed will boost interest rates for a ninth time when policy-makers meet at the end of this month. The Fed began a campaign of gradual quarter-point rate hikes a year ago in an effort to make sure the economic recovery did not generate unwanted inflation.

The 0.6 percent drop last month in wholesale prices was the biggest since a 1.5 percent plunge April 2003, a decline that was also propelled by falling energy prices.

The drop in the PPI, designed to measure inflation pressures before they reach the consumer, was much bigger than expected. Analysts had been forecasting a more modest decine of around 0.2 percent.

Over the past 12 months, wholesale prices have risen by 3.5 percent, but excluding food and energy the increase has been a more modest 2.6 percent.

The 3.5 percent May drop in energy costs was the biggest decline in this category since a 7.2 percent plunge in April 2003. Gasoline costs fell by 9.9 percent, accounting for half of the overall drop in the energy area. The price of home heating oil was down 7.8 percent while natural gas prices fell by 0.9 percent.

The 0.3 percent decrease in food costs was the first decline since a 0.5 percent drop in January. It was led by a 15 percent drop in the cost of vegetables, the biggest drop in vegetable prices since December. In May, the cost of eggplant, broccoli, lettuce, spinach, cauliflower, green peppers and sweet corn all showed big decreases.

The cost of dairy products and chicken also fell, but egg prices jumped by 19.5 percent, the biggest rise since February, while beef prices were up 1.9 percent.

Outside of food and energy, the price of cigarettes was up 0.8 percent but the price of passenger cars fell by 0.2 percent and computer prices were down 4.8 percent.

The 0.5 percent drop in retail sales was the first decline since August 2004 when sales had fallen by 0.1 percent. It was the biggest decline since sales fell a similar 0.5 percent in June 2004.

The drop was slightly worse than the 0.2 percent decrease economists had been forecasting for May. Excluding autos, retail sales would have been down a smaller 0.2 percent.

The Associated Press contributed to this report.

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