Producer prices rise as gasoline costs jump

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Producer prices rose twice as much as expected in August, but if energy prices moderate in the months ahead, economists say inflation should not increase.

Producer prices rose 1.7 percent in August, the U.S. Labor Department announced Tuesday, as energy prices jumped 8.0 percent. Gasoline prices rocketed 23.0 percent during the month. Excluding the often-volatile food and energy component, producer prices rose just 0.2 percent in August.Economists surveyed by Bloomberg News had expected producer prices to increase 0.8 percent in August. Producer prices fell 0.9 percent in July, and rose 1.8 percent in June. Economist had expected the core rate to rise 0.1 percent in August.

Full-year PPI: Little price pressure

Further, the tame inflation at the producer price level is evidenced by the 12-month PPI rate: producer prices have fallen 4.3 percent the past year.

Business executives, economists and, in particular, Fed officials closely monitor the producer price index because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core-PPI statistic, which excludes the often-volatile food and energy component, to gauge core business costs.

In August, energy prices rose 8 percent, food prices increased 0.4 percent, finished goods prices climbed 0.4 percent, car prices rose 0.7 percent, and light truck prices increased 0.8 percent.

Economic Analysis: The 1.7 percent rise in August PPI was a surprise, but it can be ignored, so long as energy prices -- particularly oil and gasoline prices -- moderate in the months ahead. The important statistic in the August PPI data is the core rate, which rose just 0.2 percent. The headline 1.7 percent PPI was skewed higher by a sharp rise in gasoline prices, so investors should not assume inflation is accelerating. Further, the lack of pricing power in the economy is clear: producer prices have plunged more than 4 percent in the past year, indicating that a lack of demand and a slack labor market has eliminated corporate pricing power and wage pressure.

The upside of the above is that the Fed will be able to continue its interest rate and quantitative easing policy to stimulate the U.S. economy without fear of inflation.
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