Wholesale Prices Dip, Easing Inflation Fears : Economy: Figures are surprising after hefty increases of July and August. Wall Street starts off giddy, calms down.

Wholesale prices took a surprising fall in September, their biggest month-to-month drop in more than a year, the Labor Department reported Thursday, temporarily easing investor fears that inflation is getting worse.

The producer price index for finished goods fell 0.5% from August on a seasonally adjusted basis, due mainly to lower energy and food prices and an unexpected fall in the price of automobiles, the department said. It was the largest decline since a 0.8% drop in August, 1993.

The decline was especially surprising because it came on the heels of a 0.5% increase in July and a 0.6% jump in August. Through September, wholesale price inflation was running at a 1.9% annual rate.

Even when volatile energy and food prices were excluded, the so-called core component of the index increased only 0.1% in September, well below both economists’ expectations and August’s 0.4% increase.

“It shows that inflation really doesn’t look as bad as everybody thought,” said Labor Department economist Scott Sager. “This month’s report should put a lot of fears to rest.”

Investors initially welcomed the news before moderating their enthusiasm later in the day in anticipation of key government price and economic reports due out today.

The Dow Jones industrial average soared more than 50 points in the first 15 minutes of trading, triggering the New York Stock Exchange’s program-trading controls, before settling down and closing 14.80 points higher at 3,889.95.

Similarly, the 30-year Treasury bond yield dropped to 7.85% from 7.90% on Wednesday. Earlier in the day, the yield--a bellwether of long-term interest rates--fell as low as 7.76%.

How significant is Thursday’s news? That will depend in part on a raft of indicators to be released today, including September consumer price data, manufacturing production and retail sales numbers. Economists doubted the consumer price index would reflect the sharp decline in wholesale prices, at least not yet.

In any case, economists believed that Thursday’s news would not deter the Fed from boosting short-term rates again when its rate-setting Open Market Committee meets Nov. 15. They foresaw the Fed bumping up rates between a quarter to half a percentage point.

“I think (August’s) producer price index probably grossly exaggerated how high inflation was, and this one overstates the weakness in inflation,” said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio. “We’re probably somewhere in the middle.”

Falling energy prices contributed most to the decline in the producer price index, Sager said. Prices of finished energy goods, including gasoline and heating oil, fell a sharp 2.9% in September, their biggest decline since December. Prices also declined for residential electric power after rising in August. The declines reflect a worldwide glut of crude oil on the world market relative to demand, Reaser said.

One of the surprises in the index was the fall in the price of passenger cars, since the industry has been touting its lean inventories. They dipped 1.1% in September, the largest decline since a 2.6% drop in October, 1993, the Labor Department said. They had increased 0.7% in August.

The decline was all the more striking since the figures are seasonally adjusted, taking into account the normal price declines that come with the end of the automobile model year.

Auto makers competing for year-end business have been discounting their leftover 1994 models more than usual in an attempt to clear them out before 1995 models arrive, analysts said.

Prices for finished foods dropped 0.2% after rising 0.7% in August. The largest component of that was coffee, which reported a record 10.3% drop in prices. Prices of roasted coffee had soared 12% in August and a whopping 42.8% in July in the wake of damaging frosts in Brazil.

Separately, the Labor Department reported that initial claims for state unemployment benefits fell to 314,000 in the week ended Oct. 8, from a revised 319,000 the week before.

Producer Price Index

For finished goods; seasonally adjusted change from prior month:

Sept. 1994: -0.5%

Source: Labor Department * MARKET WATCHES

Wall Street anxiously awaits government economic figures today. D2