Wholesale Prices in U.S. Decrease by Most in Three Years

Courtesy of Bloomberg by Alex Kowalski: Wholesale prices in the U.S. dropped in April by the most in three years, reflecting a decrease in fuel costs that is helping underpin profits.

The producer-price index declined 0.7 percent, the biggest decrease since February 2010, after falling 0.6 percent in March, according to a Labor Department report released today in Washington. The median estimate in a Bloomberg survey of 73 economists projected the index would decline 0.6 percent. So-called core wholesale inflation, which excludes often-volatile food and energy prices, climbed 0.1 percent.

Slow growth in the U.S. and abroad is holding input-price gains in check for American factories. Absent a surge in inflation, policy makers at the Federal Reserve have the option of weighing whether the U.S. economic expansion needs more stimulus to pick up.

“For now, producers are in a pretty comfortable position,” said Jacob Oubina, a senior economist at RBC Capital Markets LLC in New York, who correctly forecast the April drop in prices. “Input costs are benign at the moment.”

Another report today showed manufacturing in the New York region unexpectedly shrank in May as factories received fewer orders and sales stagnated. The Federal Reserve Bank of New York’s general economic index declined to minus 1.4 this month from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey called for an increase to 4.

Economists’ estimates for the April producer-price index ranged from a drop of 1.2 percent to a gain of 0.5 percent. The increase in core wholesale prices matched the median forecast in the Bloomberg survey.

Compared with a year ago, companies paid 0.6 percent more for materials in April, the smallest year-to-year gain since July. The core price index climbed 1.7 percent in the past 12 months through April, the same as in the prior month, today’s report showed.
Fuel costs dropped 2.5 percent in April from the previous month, led by an 8.8 percent plunge in the cost of home heating oil that was the biggest in almost four years.

The cost of finished consumer foods declined 0.8 percent as vegetable prices fell by almost 11 percent. Squash prices plunged 62 percent, the most in five years.

Prices also dropped further down the production pipeline. Expenses for intermediate goods, including diesel fuel and chemicals, decreased 0.6 percent. Costs for crude goods, such as corn and metals, fell 0.4 percent.

Officials at the Fed are debating what slower inflation means for monetary policy. Federal Reserve Bank of Philadelphia President Charles Plosser said yesterday that recent tepid price gains don’t yet warrant a response.

“Should inflation expectations begin to fall, we might need to take action to defend our inflation goal, but at this point, I do not see inflation or deflation as a serious threat in the near term,” Plosser said.

Central bankers including St. Louis Fed President James Bullard said last month persistent disinflation may require the Fed to provide stimulus beyond the $85 billion in monthly bond purchases it has already undertaken.

Consumer prices rose 1 percent in March from a year earlier, the least since October 2009 as measured by the Fed’s preferred gauge of inflation. The Fed aims for a 2 percent inflation pace.

Manufacturing executives, such as those at Cooper Tire & Rubber Co. (CTB), the second-largest U.S. tiremaker, have also taken notice of the lack of price pressures.

“We believe raw material prices have been constrained due to relative low growth in the global economy,” Roy Armes, the Findlay, Ohio-based tiremaker’s chief executive officer, said during a May 9 earnings call. An index of input costs tracked by Cooper was down 10 percent in the first quarter compared with a year earlier, he said. “However, we continue to maintain that, on a longer-term basis, raw-material prices will generally trend higher and, at times, may be volatile as economic growth gains momentum in the future.”

The producer-price index is one of three monthly inflation gauges released by the Labor Department. The import-price index, published yesterday, fell 0.5 percent in April on cheaper fuel. The consumer-price index, due tomorrow, is expected to decline 0.3 percent, according to the median estimate in a Bloomberg survey of economists.

Category: Featured, General Update