Price plunge calms US inflation fears

WASHINGTON - A steep drop in US wholesale prices last month helped to dispel fears of renewed inflationary pressures in the American economy and encouraged expectations that low interest and mortgage rates would persist, write David Usborne and Michael Marray.

It seems likely that the latest producer price index, showing a 0.3 per cent drop last month, should be enough to dissuade the Federal Reserve from raising interest rates, which stand at their lowest in more than 20 years. The fall in the PPI, measuring the price of foods and factory goods paid by wholesalers to producers, was the sharpest in more than two years and was prompted in particular by a sudden plunge in vegetable prices.

Some less encouraging inflation reports earlier this year had stoked concerns that US inflation was about to accelerate. Prospects now seem more even, however, and the consumer price index, due out today, is expected also to be modest, perhaps matching the 0.1 point increase in May.

The US financial services sector yesterday saw good results from Merrill Lynch and General Electric. Merrill, the country's largest brokerage, reported record earnings for its second quarter, with net income of dollars 345m ( pounds 238m), 53 per cent up on a year earlier. Merrill benefited from underwriting a record crop of new corporate bond issues and a strong performance from broking and fund management. Merrill passed a milestone during the quarter, with its clients' assets passing dollars 500bn.

GE, which also encompasses industrial and broadcasting interests, is on course for a record year of profits after producing net income of dollars 1.33bn for its second quarter, up from dollars 1.22bn. The company said the improvement was led by plastics, the NBC television network, power systems and appliances, and GE Capital Services. The results included a dollars 678m extraordinary gain from the sale of some aerospace businesses.