Wholesale Inflation Lower Than Expected

WASHINGTON – Wholesale inflation came in tamer than expected at 0.1 percent, a number that could encourage the Federal Reserve to continue its aggressive policy to stave off recession.

The Producer Price Index, which measures inflation pressures before they reach store shelves, crept up a seasonally adjusted 0.1 percent last month, following a modest 0.3 percent increase in April, the Labor Department reported Thursday.

The latest reading on inflation at the wholesale level was better than the 0.3 percent increase many analysts were predicting.

Falling prices for a variety of food items blunted rising costs for electricity and heating oil, the Labor Department said.

The "core" rate of wholesale inflation, which excludes volatile energy and food prices, edged up for the second month in a row by 0.2 percent, matching many analysts' expectations.

With inflation well contained, the Federal Reserve has been able to act aggressively to stave off recession, slashing interest rates five times this year and driving down borrowing costs to the lowest point in seven years.

While economists are keeping their eye on inflation creep, many believe that higher prices for energy are more likely to take a bite out of companies' profits than be passed along to consumers in the form of higher prices - a difficult undertaking when the economy is weak.

In another report, the number of Americans filing new claims for state unemployment benefits fell by a seasonally adjusted 12,000 last week to 428,000, the first decline since the beginning of May. The dip, which analysts expected, followed a big spike the week before.

However, the more stable four-week moving average of claims, which smoothes out weekly fluctuations, rose to 424,500 last week, the highest level since Aug. 8, 1992. That suggested companies are continuing to lay off workers in the face of the slumping economy.

In the inflation report, food prices fell in May for the first time in five months, declining by 0.4 percent. Lower prices for eggs, fish, pork and beef swamped higher prices for fruits and vegetables and a record rise for dairy products. In April, overall food prices rose a strong 0.6 percent.

Energy prices went up by 0.2 percent in May, after a 0.1 percent rise the month before.

Residential electric power increased by 0.7 percent, up from a 0.2 percent rise in April. Heating-oil costs jumped 8 percent in May, the largest gain since September, following a 2.1 percent increase. Gasoline prices rose 0.4 percent in May, a moderation from the big 7 percent rise the month before.

Prices for cars edged down by 0.1 percent in May, and light-truck costs declined by 1.6 percent, the largest drop since February. Cigarette prices, which have been rising as companies increase costs to cover legal expenses, jumped 5.6 percent, the largest gain since January.

-- The Associated Press contributed to this report.