Wholesale prices leaped an unexpected 0.7 percent in April, while sales slowed at U.S. retailers, the government said yesterday in separate reports that added fuel to fears of inflation and rising interest rates.
As if on cue, mortgage financier Freddie Mac reported that the average interest rate on 30-year mortgages rose for the eighth straight week, to an eight-month high of 6.34 percent. Then oil and gasoline prices closed at record highs.
Soaring gasoline costs affected both the jump in prices paid by goods producers and sagging retail sales last month, economists said. Rising prices at the pump may be persuading consumers to put off shopping, especially for items not urgently needed, such as new clothes and cars, Lehman Brothers told clients yesterday. Retail sales fell 0.5 percent in April, led by a sharp decline in auto sales.
"It may suggest some pushback on the part of consumers in response to higher prices," the investment bank's economists wrote.
Fuel prices drove up costs throughout the economy last month. Gasoline costs rose 3.4 percent in April, while wholesale finished food prices climbed 1.4 percent and are now up 5.9 percent over a year ago. The price of dairy products shot up 10.4 percent, the biggest monthly increase since 1946.
Energy prices may only get worse. On the New York Mercantile Exchange, crude oil for June delivery rose 31 cents to close at an all-time high of $41.08. Gasoline for delivery next month rose 2.7 cents to settle at more than $1.40 a gallon, the highest close in the two decades that gasoline future contracts have been traded, according to Bloomberg News Service.
"Ubiquitous increases in crude prices are clearly permeating the entire marketplace," warned Jason Schenker, an economist at Wachovia Bank.
Excluding volatile food and energy prices, wholesale costs rose 0.2 percent, about what economists had forecast. But the price that manufacturers pay for partially finished goods rose by 1.1 percent, the biggest one-month gain since January 1995, according to Goldman Sachs economists. That may suggest that the sharp spike in raw material costs that appeared in January is working its way through manufacturers and will ultimately reach consumers.
"Pipeline pressures are pronounced," said Peter E. Kretzmer, senior economist at Bank of America.
Lehman Brothers analysts were similarly concerned: "There is still inflation working through the system."
Jittery financial markets reacted warily to the news -- falling, rising, then falling again. The Dow Jones industrial average closed at 10,010.74, down 34.42 on the day. Some economists cautioned that the news on wholesale prices may have only limited impact on Federal Reserve policymakers as they consider raising short-term interest rates. Competition among companies and rising worker productivity may persuade firms to absorb the costs of rising wholesale prices instead of passing them on to consumers.
Indeed, on Tuesday, Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, said he is "wary" of the argument that rising global demand for commodities will drive consumer prices higher in the United States.
"For commodity prices to increase the rate of inflation on a sustained basis, they would have to rise continuously and represent a significant component of the total cost of final goods and services," Santomero said in a New York speech. "In fact, commodity price pressure is rarely sustained and often reversed, and commodities represent a relatively small share of final product costs."
Interest rate pressures may also be tempered by disappointing retail sales last month. Sales slid 0.5 percent, to $331.8 billion, the first decline in seven months. Excluding auto sales, which dropped 1.8 percent, retailers experienced a much smaller 0.1 percent decline. Sagging sales were pronounced for clothes sellers, department stores and restaurants.
"This suggests considerable softening of the pace of retail activity," Goldman Sachs economists told their clients. "Real consumer spending grew at a 2 percent annual rate from December to March, and there are no signs of acceleration in April."
The one bright spot was in construction, the economic sector that has helped keep the economy afloat for three years. Building materials and garden equipment sales fell just 0.7 percent, far less than expected after their huge 11 percent gain in March.
But the strength of that sector could be undermined by rising interest rates that have already begun to be felt in the housing market. Rates on 30-year fixed-rate mortgages have risen almost a full percentage point since they hit 5.38 percent in mid-March. The leap was particularly steep for the week that ended Thursday, Freddie Mac said, to 6.34 percent from 6.12 percent. At this time last year, a comparable mortgage cost 5.45 percent.
Frank Nothaft, Freddie Mac vice president and chief economist, blamed rising payrolls last month for pushing up yields on bonds. Mortgage rates had to follow suit, he said, and the Fed will likely be next.
"Last month's huge surge in employment figures reaffirmed market expectations that the Fed will move sooner now rather than later" to raise interest rates, Nothaft said.