U.S. Producer Prices Rose 0.2% in July, Easing Deflation Concern

Before you go, we thought you'd like these...
Before you go close icon
Manufacturing, producer price indexProducer prices, which rose a less-than-expected 0.2% in July, but a higher-than-expected 0.3% at the core level, exhibited signs of low inflation. And that's probably just what the U.S. Federal Reserve wants at this stage of the recovery.

Why is a little inflation at the wholesale level beneficial? It means deflation hasn't taken hold in the U.S. economy, despite its substantially smaller workforce and globalization's cost-cutting impact.

Deflation -- a period of sustained price declines -- robs companies of revenue, and it can lead to a recession or even worse economic conditions. It's a price scenario the Fed would take considerable action to avoid, if surfaces.

July's PPI increase was also the first rise in this measure since March. A Bloomberg survey had expected producer prices to rise 0.5% in July and the core rate to rise 0.1%. Producer prices fell 0.5% in June and the core rate rose 0.1%.

Minus Energy and Food, Not Much Going On

However, for the past 12 months, inflation at the wholesale level has increased 4.2%. That's higher than the 2.8% year-over-year rate recorded in June, but investors should keep in mind the 4.2% rate contains a period when energy prices, particularly gasoline prices soared. Wholesale prices rose 4.4% in 2009 and 0.9% in 2008.

Still, take away the often-volatile energy and food component, and there's little sign of inflation in the past 12 months. Core producer prices have risen just 1.5% in the past year. That's higher than the 1.1% year-over-year core rate recorded in June, but it's still within the Fed's "comfort zone" for inflation.

It's easy to see which factors pushed wholesale prices' core rate higher in July. Light trucks, including SUVs and pickups, increased 1.5%, and that accounted for almost half of July's price rise. Capital equipment also rose 0.3%. Wholesale food increased 0.7%, and energy fell 0.9% in July.

In sum, July's PPI report shows a U.S. economy with some price pressure in selected categories at the wholesale level, but that (so far) hasn't lapsed into deflation. The current low rate of inflation should, at minimum, enable the Fed to maintain through the fall its "extended period" low interest rate monetary policy aimed at stimulating the economy.
Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners