U.S. producer prices recorded their largest drop in three years in April as gasoline and food costs tumbled, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.
The Labor Department said Wednesday its seasonally adjusted producer price index fell 0.7 percent last month, the biggest decline since February 2010. Wholesale prices had dropped 0.6 percent in March.
A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries dropping 0.6 percent last month.
In the 12 months through April, wholesale prices were up only 0.6 percent, the smallest increase since July last year. Prices had increased 1.1 percent in March. Underscoring the tame inflation environment, wholesale prices excluding volatile food and energy costs nudged up 0.1 percent, the smallest increase since November.
The so-called core PPI had risen 0.2 percent in each of the previous four months. In the 12 months through April, core PPI advanced 1.7 percent after rising by the same margin in March.
"With previous falls in some commodity prices still to feed through, a further fall in producer price inflation is on the cards, said Paul Dales, senior U.S. economist at Capital Economics in London.
"This is especially the case when the weak activity climate is preventing producers from raising margins," he said.
The report was the latest suggestion that disinflation was starting to creep in against the backdrop of lackluster domestic and global demand.
Consumer inflation was muted in March, with a measure closely watched by the Fed slowing sharply below its 2 percent target during the 12-month period. With little sign of pipeline price pressures, consumer inflation should remain low this year.
That should give the U.S. central bank room to maintain its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and speed up job growth.
Weak domestic and global demand are hurting the nation's factories. A second report showed manufacturing activity in New York state unexpectedly contracted in May as new orders and shipments of finished goods fell.
The New York Federal Reserve's "Empire State" general business conditions index fell to minus 1.43 this month from 3.05 in April. Economists had expected the index to rise to 4.
U.S. Treasury debt prices rallied on the reports, while the dollar trimmed gains versus the euro and the yen.
Last month, wholesale gasoline prices fell 6.0 percent after dropping 6.8 percent the prior month. That drop helped to push wholesale energy prices down 2.5 percent.
Weak energy prices accounted for over 80 percent of the drop in wholesale prices last month.
Producer prices were also dampened by a 0.8 percent decline in food prices, the largest fall since May 2011. Food prices were held down by a collapse in the wholesales prices of strawberries, eggs and fresh and dry vegetables.
Away from food and gasoline, passenger car prices slipped 0.2 percent, while light truck prices dipped 0.1 percent.
9 Numbers That'll Tell You How the Economy's Really Doing
Producer Prices Post Biggest Drop in Three Years
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.