U.S. Producer Prices Tumble 0.6% in February

Inflation remained inert at the wholesale level in February as producer prices unexpectedly plunged, the U.S. Labor Department announced Wednesday. A large decline in energy prices was the primary reason for the lower reading. But reinforcing the stability of wholesale prices, the core rate, which excludes the often-volatile food and energy component, rose just 0.1% in February.

A Bloomberg News economists survey had expected producer prices to fall 0.2% after January's 1.4% increase. Economists also had expected the core rate to rise 0.1% after an 0.3% increase in January. Inflation at the wholesale level in the past 12 months has trended at the same pace as in calendar 2009, rising 4.4%. Wholesale prices rose 0.9% in 2008.

However, the more-telling core rate shows scant inflation in the past year: It has risen just 1% in the past 12 months -- or well within the U.S. Federal Reserve's "comfort zone" for inflation. Outside of food and energy, wholesale prices have shown little inflation in the past year.

Minor Rises Across the Board

In February, one can see the downward effect of lower energy prices, which sank 2.9%, including an 8.7% plunge in crude oil. Food prices rose 0.4% -- their fifth straight monthly increase. Otherwise, prices rises were minor: capital equipment fell 0.1%, finished consumer goods (excluding foods) decreased 1%, household appliances dipped 0.1%, intermediate materials rose 0.1%, feedstuffs declined 1.4% and motor vehicle parts rose 0.1%

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 are especially attuned to the core PPI statistic to gauge basic business costs.

In sum, the tame February producer price report is good news for investors because it should allow the Fed to maintain low interest rates -- its accommodative monetary policy -- for as long as it deems necessary. That will give the economy more time to gain momentum and businesses more time to expand -- including the hiring of new employees -- without the additional concern of rising interest rates.