Producer Prices in U.S. Dropped More Than Forecast

Producer Prices in U.S. Dropped More Than Forecast (Update2)

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By Courtney Schlisserman

March 17 (Bloomberg) -- Wholesale prices in the U.S. fell in February more than anticipated, led by a drop in fuel costs and signaling there are few inflation pressures building in the early stages of the economic recovery.

The 0.6 percent decrease in prices paid to factories, farmers and other producers was the biggest since July and followed a 1.4 percent January increase, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices climbed 0.1 percent.

Companies will probably continue to hold the line on prices as the expansion has yet to soak up enough excess capacity or create jobs. The report bears out forecasts by Federal Reserve policy makers, who yesterday retained a pledge to keep the main interest rate near zero for an “extended period,” and said “inflation is likely to be subdued for some time.”

“Disinflation is going to be with us for a while,” Julia Coronado, a senior U.S. economist at BNP Paribas in New York, said in a Bloomberg Radio interview. “That’s going to allow the Fed to stay on hold for a lot longer than the market is expecting.”

Stock-index futures climbed after the report, while Treasury securities were little changed. The contract on the Standard & Poor’s 500 Index rose 0.2 percent to 1,157.2 at 8:52 a.m. in New York. The yield on the benchmark 10-year note was at 3.65 percent, the same as late yesterday.

Bigger Drop

Economists forecast a 0.2 percent decrease in February producer prices, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from a drop of 0.6 percent to a 0.5 percent increase.

Prices excluding food and energy were forecast to rise 0.1 percent after a 0.3 percent gain the month earlier, according to the survey median.

Compared with a month earlier, energy costs dropped 2.9 percent in February, led by diesel fuel and gasoline. The cost of food increased 0.4 percent

An increase in wholesale auto prices pushed core costs higher. The measure was restrained by a drop in the cost of capital equipment, led by declines in construction machinery and a record decrease in prices of office furniture.

Producer prices are one of three monthly inflation measures reported by the Labor Department. The cost of imported goods decreased 0.3 percent in February, the government said yesterday. It is scheduled to release the consumer price index tomorrow.

Fed Policy

Fed policy makers yesterday gave no hint they were preparing to raise the target interest rate on overnight loans between banks any time soon. Low levels of capacity use, high unemployment, tame inflation and stable expectations on the likely trajectory of prices were among the “economic conditions” the central bankers cited for the lack of urgency.

The Fed has kept the federal funds rate target for overnight loans in the zero to 0.25 percent range since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since.

Producer prices were up 4.4 percent compared with a year earlier, down from a 4.6 percent gain in the 12 months to January.

Core producer prices climbed 1 percent from February 2009, matching January’s year-over-year increase.

Fuel Costs

A jump in petroleum costs since early last year may keep year-over-year comparisons elevated in coming months. The price of a barrel of crude oil traded on the New York Mercantile Exchange averaged $76.45 last month. In February 2009 it averaged $39.26.

Consumers in the Reuters/University of Michigan preliminary survey, released March 12, said they expect an inflation rate of 2.7 percent over the next five years. Those figures are tracked by Fed policy makers as well.

After expanding at a 5.9 percent rate in the fourth quarter, the fastest pace of growth in four years, economists surveyed by Bloomberg News earlier this month anticipate the world’s largest economy will grow at an average 2.75 percent rate in the first half of this year, less than previously projected.

The analysts also lowered inflation estimates. The Fed’s preferred price measure, which tracks consumer spending and excludes food and fuel costs, will probably rise 1.2 percent this year, according to this month’s survey, the smallest gain since 1962. The central bank’s long-term forecast for the gauge calls for gains in a range of 1.7 percent to 2 percent.

Spare Capacity

Low capacity utilization may also be helping companies refrain from raising prices. Plant use was 72.7 percent in February, according to a Fed report released March 15. The gauge averaged 80 percent over the past 20 years.

Royal Ahold NV, the owner of Stop & Shop supermarkets, is among companies keeping prices low to entice cash-strapped U.S. shoppers contending with an unemployment rate near 10 percent.

Chief Executive Officer John Rishton began cutting prices, lowering costs and refurbishing stores in the U.S. two years ahead of competitors like Supervalu and Kroger Co. That boosted sales and profitability at Ahold’s U.S. chains, which account for more than half of the Amsterdam-based company’s revenue. Food prices will continue to fall during the first half of this year, Rishton said earlier this month.