Producer prices drop in September as energy costs fall

Inflation remains a nonfactor in the U.S. economy. Producer prices plunged 0.6 percent in September, the U.S. Labor Department announced Tuesday. A reversal in energy prices dragged the index lower, keeping a lid on inflation at the wholesale level.

Energy costs did a u-turn in September, falling 2.4 percent, after surging 8.0 percent in August. Further, the core PPI rate, which excludes the often-volatile food and energy component, fell 0.1 percent during the month.

Economists surveyed
by Bloomberg News had expected producer prices to decrease 0.3 percent in September after rising 1.7 percent in August. Producer prices fell 0.9 percent in July, and rose 1.8 percent in June. Economists also had expected the core rate to rise 0.1 percent in September after increasing 0.2 in August.

Full-year PPI: Little price pressure

Further evidence of tame inflation at the producer price level is the 12-month PPI rate: Producer prices have fallen 4.8 percent in the past year. Also, over that time the core rate has risen just 1.8 percent -- within the U.S. Federal Reserve's "comfort zone" for inflation.

In September, finished goods prices fell 0.1 percent, intermediate goods rose 0.2 percent, capital equipment fell 0.1 percent, and food stuffs/feeds declined 1.2 percent. The month's 2.4 drop in energy prices means that category is down about 22 percent in the past year.

Business executives, economists and in particular Fed officials closely monitor the PPI because it provides an early-stage warning about 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.

Economic Analysis: The large decline in energy prices did push the September statistic well into negative territory, but the core rate's 0.1 percent dip is also indicative of scant pricing power in the economy. And that's something you'd expect given slack demand conditions and ample productive capacity: Businesses are barely able to pass on rising costs.

Still, the core's rate's rise of 1.8 percent in the past 12 months is reassuring because it means the U.S is experiencing disinflation, but (so far) not the dreaded deflation -- a period of sustained price declines that robs companies of revenue. Moreover, the Fed will greet the September data favorably because inflation at the producer level isn't rising, and businesses are mostly able to maintain prices, although without much upside power.
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