Producer Prices Drop But Inflation Still Threatens

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Producer Prices
Erik Schelzig/AP
By Lucia Mutikani

WASHINGTON -- U.S. producer prices fell in May after two month of solid gains, but the decline wasn't enough to change perceptions that inflation pressures are steadily creeping up.

The Labor Department said Friday its producer price index for final demand slipped 0.2 percent after advancing in April by 0.6 percent, which was the largest gain in 1½ years.

Economists, who had expected producer prices to edge up, saw the decline as a correction after gains in March and April, and said it didn't change their view that prices were firming.

"The net result is a pick-up. The net strengthening makes the modest acceleration in the more important consumer inflation measures more credible," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The government revamped the PPI series at the start of the year to include services and construction. Big swings in prices received for trade services have injected volatility into the series, making it hard to get a good read on inflation.

The overall inflation backdrop remains generally tame, with the main gauge watched by the Federal Reserve continuing to run below the U.S. central bank's 2 percent target.

Still, key consumer inflation measures pushed up in April and are expected to continue edging higher as the labor market tightens and the economy regains momentum. That should position the Fed to raise interest rates in the second half of 2015.

Moving Towards Target

The U.S. central bank, which is already scaling back the amount of money it is injecting into the economy through monthly bond purchases, has kept overnight lending rates near zero since December 2008. Fed officials meet Tuesday and Wednesday to assess the economy's health and their monetary policy stance.

"They will probably say inflation is trending toward its 2 percent goal," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

%VIRTUAL-article-sponsoredlinks%A separate report showed consumer sentiment slipped slightly in early June. The Thomson Reuters/University of Michigan's consumer sentiment index was at 81.2 from 81.9 in May.

The report offered a mixed reading on the outlook for prices. Households' prediction of inflation a year out fell to a six month low of 3 percent from 3.3 percent in June, but the five-year projection ticked up to 2.9 percent from 2.8 percent.

Producer inflation in May was depressed by broad price declines at the factory gate, while wholesale food prices snapped four consecutive months of increases.

There were also declines in the prices of trade services, a gauge of retailers' and wholesalers' margins.

And while wholesale gasoline prices fell last month, economists cautioned increases were in the cards because of the unrest in Iraq.

A recent spike in the price of oil "should filter through to the economy over the next several months, especially if the sectarian violence [in Iraq] continues," said Jay Morelock, an economist at FTN Financial in New York.

In the 12 months through May, prices received by the nation's farms, factories and refineries rose 2 percent, moderating from April's 2.1 percent gain.

Producer prices excluding food, energy and trade services were flat after advancing 0.3 percent the prior month.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Producer Prices Drop But Inflation Still Threatens
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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