THE VIRGINIAN-PILOT 
              Copyright (c) 1994, Landmark Communications, Inc.

DATE: Friday, August 12, 1994                TAG: 9408120636
SECTION: BUSINESS                 PAGE: D01  EDITION: FINAL 
SOURCE: BY JAMES H. RUBINI, ASSOCIATED PRESS 
DATELINE: WASHINGTON                         LENGTH: Medium:   69 lines

SOARING COFFEE AND OIL COSTS TAKE TOLL ON INFLATION REPORT THE INCREASE WAS A SURPRISE. BUT IF ENERGY AND FOOD WEREN'T CONSIDERED, THE WHOLESALE PRICES WOULD HAVE RISEN ONLY 0.1%. STILL, THE FED, WITH AN EYE ON THE FUTURE. IS EXPECTED TO ACT.

Sharply higher costs for gasoline, oil and coffee in July fueled the biggest rise in wholesale prices in more than a year.

The Producer Price Index, which measures inflation pressures before they reach the consumer, rose 0.5 percent last month - matching the gain of April 1993, the Labor Department reported Thursday. Not since October 1990, when the index climbed 1.1 percent, was there a larger one-month advance.

But nearly all the increase was from three factors:

A record-breaking 42.8 percent jump in coffee prices due to a ruinous frost in Brazil.

An 8 percent rise in gasoline prices, the largest in nearly four years.

A 6.4 percent surge in heating oil costs.

The underlying inflation rate, excluding volatile energy and food prices, was up only 0.1 percent after falling 0.1 percent in June.

Still, analysts predicted the Federal Reserve will boost short-term interest rates for the fifth time this year when the central bank's policy-setting Federal Open Market Committee meets Tuesday.

``The Federal Reserve is not looking at current inflation. It's worried about the future,'' said economist David Wyss of DRI-McGraw Hill, a forecasting service in Lexington, Mass.

Financial markets were lower Thursday, partly in response to the inflation figures. But analysts said a poor bond auction by the Treasury played a major role in the decline, as the Dow Jones industrial average dropped nearly 16 points and the dollar hit a three-week low against the German mark.

Four times since February, the Fed has boosted the target rate that banks charge each other for overnight loans, taking it from 3 percent to 4.25 percent. Most analysts expect another increase of a quarter-point next week.

But they said the latest inflation figures are reassuring.

``When you peel back the producer-price onion, you find most goods' prices other than oil and coffee in fact remain well-behaved,'' said Ron Schreibman of the National Association of Wholesaler-Distributors.

``With the economy expected to slow over the second half of the year from the 3.5 percent rate of the first half, it appears that inflation isn't likely to mount,'' said Robert Barr of the U.S. Chamber of Commerce.

For the first seven months of this year, the wholesale index climbed a moderate 2.2 percent at an annual rate; it was up just 0.6 percent for the past 12 months. It inched up 0.2 percent for all of 1993.

THE WHOLESALE PRICE GAUGE was a little worse than most analysts had predicted. The index had been unchanged in June after declining 0.1 percent in May and remaining level in April.

Energy prices rose 2.5 percent last month, the biggest advance since a frigid February, as Americans turned up the air conditioning in homes and at work. Energy costs were up only 0.3 percent in June.

The 8 percent advance in gasoline prices was the steepest since October 1990, when they rose 8.6 percent during the Persian Gulf crisis.

While inflation has been restrained, many analysts expect it to pick up because some commodity prices, particularly metals, already are higher and the latest government figures indicate worker shortages are possible.

KEYWORDS: ECONOMY INFLATION

by CNB