October producer prices rise 0.3% on higher energy, food costs

october-producer-prices-rise-0-3-on-higher-energy-food-costsInflation remained nearly inert at the wholesale level, as producer prices rose just 0.3% in October, the U.S. Labor Department announced Tuesday, with rising food and energy prices offsetting a sharp decline in other items. Excluding the often-volatile food and energy component, producer prices fell -0.6% in October.

The consensus from the Bloomberg News survey of economists had been that producer prices would increase 0.5% in October; they fell 0.6% in September. Economists also had expected the core rate to rise 0.1% in October after decreasing 0.1% in September.
Full-year PPI: Little Price Pressure

The tameness of inflation at the producer price level is evidenced by the 12-month PPI rate: Producer prices have fallen 1.9% in the past year.

Meanwhile, in the past year, the core rate has risen just 0.7% – within the U.S. Federal Reserve's comfort zone for inflation.

In October, one can see the skew-effect of higher energy and food prices, both of which rose 1.6%.

Other producer price categories registered declines or increased only mildly: durable goods fell 1.2%; materials/components for manufacturing declined 0.3%; capital equipment decreased 0.7%; finished goods rose 0.3%; and construction materials increased 0.4%.

Business executives, economists and Fed officials monitor the producer price index closely 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 components, to gauge core business costs.

The October PPI report is consistent with the U.S. Federal Reserve's analysis of price pressure. "Longer-run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation," Fed Chair Ben Bernanke said in a speech before the Economic Club of New York Monday. "Expectations can be early warnings of actual inflation, however, and must be monitored carefully."

Economic Analysis

The increase in food, energy prices did push the October PPI into positive territory, but the key statistic is the core rate, which registered a 0.6% decline. Inflation at the wholesale level is dormant. In fact, the large decline in the core rate will likely renew concerns about deflation pressure in the U.S. economy. With little wage pressure, and no sign of robust demand, some price categories may remain under deflation pressure. At a minimum, the current PPI trend will enable the Fed to maintain a low-interest-rate monetary policy to stimulate the U.S. economy. At this point in the recovery, rising inflation is not a threat.
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