Producer Prices in US Increase Less Than Forecast
Nov. 17 (Bloomberg) -- Wholesale prices in the U.S.increased in October for just the second time in the past fourmonths, indicating inflation will not be a concern for theFederal Reserve.
The 0.3 percent increase in prices paid to factories,farmers and other producers was smaller than forecast andfollowed a 0.6 percent drop in September, according to LaborDepartment data released today in Washington. Excluding foodand fuel, so-called core prices unexpectedly dropped 0.6percent, capping the smallest 12-month gain in five years.
Excess capacity near June’s record low of 68.3 percentwill probably prevent suppliers from passing on the recentrebound in commodity costs for months to come. The reportunderpins Fed expectations, reiterated yesterday by ChairmanBen S. Bernanke, that inflation will be “subdued,” allowingpolicy makers to keep interest rates low for an “extendedperiod.”
“With weak final demand and limited cost pressure,there’s no reason to see core inflation turn up here,” saidZach Pandl, an economist at Nomura Securities InternationalInc. in New York. The slower gain in core prices from a yearearlier “is closer to what the Fed would like to see.”
The yield on the 10-year Treasury note climbed to 3.39percent at 9:00 a.m. in New York ahead of a Federal Reservereport later this morning that economists say will showindustrial production rose for a fourth month.
Less Than Forecast
Economists forecast prices would rise 0.5 percent,according to the median of 73 estimates in a Bloomberg Newssurvey. Estimates ranged from no change to an increase of 1.3percent.
The decrease in prices excluding food and energy lastmonth was the biggest since July 2006. The core measure wasforecast to rise 0.1 percent after a 0.1 percent drop a monthearlier, according to the Bloomberg News survey.
Compared with a year earlier, companies paid 1.9 percentless for goods today’s report showed. Core costs were up 0.7percent from a year earlier, the smallest 12-month gain sinceMarch 2004.
Prices overall were buoyed by 1.6 percent increases inboth food and fuel as the cost of everything from gasoline tovegetables and fruit climbed.
Declining prices of light trucks and passenger cars, whichreflected the switch to the 2010 model year, pushed core costslower.
Prices Measures
Producer prices are one of three monthly inflation gaugesreported by the Labor Department. The cost of imported goodsrose 0.7 percent in October and increased 0.4 percent excludingenergy. The government is scheduled to release its consumerprice report tomorrow.
“Inflation seems likely to remain subdued for sometime,” Bernanke said yesterday in a speech to the EconomicClub of New York. He also said “significant economicchallenges remain.”
One challenge is trying to absorb excess capacity. Theshare of plants in use reached 68.3 percent in June, the lowestlevel since records began in 1967, according to Fed data.Economists track operating rates to gauge factories’ ability toproduce goods with existing resources. Lower rates reduce therisk of bottlenecks that can force prices higher.
Fed policy makers this month reiterated plans to keepinterest rates near zero for “an extended period” andspecified for the first time that policy will stay unchanged aslong as inflation expectations are stable and unemploymentfails to decline.
Holding Prices Down
Some companies still see pressure to hold down costs. Wal-Mart Stores Inc. Chief Executive Officer Michael T. Durke saidthe company continues “to experience ongoing deflation acrossour businesses.”
Huntsman Corp., a chemical maker, said Nov. 4 that third-quarter sales fell 23 percent to $2.11 billion as a 3 percentincrease in volumes could not make up for a 25 percent drop inprices.
Nonetheless, the dollar’s 15 percent drop since March 5according to the index which IntercontinentalExchange Inc. usesto track the currency’s value against the euro, yen, pound,Canadian dollar, Swiss franc and Swedish krona, and expandingglobal economies are forcing up commodity costs.
The U.S. last week raised its forecast for crude-oilprices this year and next on speculation that demand will riseas the global economy improves.
To contact the reporter on this story:Courtney Schlisserman at cschlisserma@bloomberg.net
Last Updated: November 17, 2009 09:09 ESTSource: Bloomberg
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