Wholesale Prices Off 0.4% --Steepest Drop in 3 Years : Car and Gas Prices Spark July Decline

WASHINGTON — Wholesale prices, driven downward by new car discounts and cheaper gasoline, fell 0.4% in July, their biggest drop in three years, the Labor Department said today.

At the same time, the Commerce Department said that retail sales jumped 0.9% last month and that consumer spending in May and June was not as sluggish as previously thought.

Analysts said the double dose of good economic news showed that inflationary pressures are easing and that the economy is in no danger of tumbling into a recession. But the financial markets were skittish: Although stocks and bonds rose 14 points early in the day, the Dow Jones industrial average closed 28.64 lower.

Presidential spokesman Marlin Fitzwater said the day’s reports show that the country is on “a sound economic course.”

Private economists, who have spent much of the year alternately worrying about a possible inflationary spiral or an imminent recession, said today’s reports show that both fears were overblown.

‘Best of Both Worlds’

“(Federal Reserve Chairman) Alan Greenspan has pulled off what most of his critics said couldn’t be done,” said Michael K. Evans, head of a Washington forecasting firm. “You aren’t going to find any reasonable economist now who will tell you that we are heading into a recession.”

Many analysts said the July increase in retail sales, the strongest advance since April, coupled with upward revisions in the previous two months showed renewed confidence in the important consumer sector.

“We have the best of both worlds, no inflation and increasing consumer spending,” said Dirk Van Dongen, president of the National Assn. of Wholesaler-Distributors.

The 0.4% July fall in wholesale prices was the biggest one-month drop since July, 1986, when prices eased 0.8%. Last month’s decline followed a 0.1% decline in June and amounted to the first back-to-back declines since four consecutive downturns from January through April of 1986.

The news on inflation was particularly welcome because it came after a surge in prices earlier in the year triggered fears that the country could be on the verge of another inflationary spiral.

Unsold Car Inventory

Before the consecutive declines, wholesale costs this year were racing ahead at an annual rate topping 9%. With the declines, the annual inflation rate is now a more moderate 5.7%.

The two biggest factors pushing prices down in July were a 7.2% plunge in gasoline costs and a 1.9% drop in new car prices.

Labor Department analysts credited the drop in car prices to unusually early end-of-the-model-year price cutting by auto makers trying to clear out large inventories of unsold cars before 1990 models appear. That development boosted car sales in the retail sales report as well.

The gasoline price decline, the biggest monthly drop since July, 1986, helped to mask an increase of 1.5% in the cost of natural gas and a 0.3% rise in home heating oil costs.

Food costs, which had plunged 0.8% in June, edged up 0.1% in July, reflecting higher beef prices, which rose 2.5%, and a 1.3% rise for fresh fruit prices.