Energy costs surged last month, but the prices paid by businesses for other finished goods remained relatively unchanged, the government reported yesterday, easing some of the recent concern over building inflation pressures.
The Labor Department's producer price index rose 0.7 in March, the fastest rate since a similar increase in November, primarily reflecting a 3.3 percent jump in prices for energy goods, including gasoline, home heating oil and diesel fuel. The index measures changes in prices paid by businesses and consumers for finished goods.
A floor trader checks stock prices, which were boosted by the Labor Department's report.
(Kathy Willens -- AP)
After excluding food and energy prices, which can swing widely month-to-month, the so-called core PPI edged up just 0.1 percent in March, the same increase as in February. Lower prices for women's clothing, home electronic equipment and autos helped offset higher prices for men's clothing, household appliances and many types of heavy equipment.
The Federal Reserve noted rising inflationary pressures in a statement after its last meeting, March 22, triggering fears in financial markets that the central bank would raise interest rates more aggressively in coming months to keep inflation contained.
Since then, however, those fears faded a bit as investors learned that job growth and retail sales slowed sharply in March, suggesting that high energy prices had cooled the pace of U.S. economic growth.
The PPI report showed that producer prices for non-energy goods were under control last month. And with crude oil and gasoline prices falling this month, businesses' energy costs should ebb as well, analysts said.
"Inflation fears were somewhat allayed by this report," Mark Vitner, senior economist with Wachovia Economics Group, wrote in an analysis for clients. "Prices for a number of key raw materials, including lumber plywood and scrap steel, have moderated in recent months. All in all, the worst of the inflation scare may be behind us."
A clearer picture may come today with the release of the Labor Department's consumer price index, the most widely followed gauge of retail inflation.
The Fed likely will raise its benchmark short-term rate by another quarter-percentage point, to 3 percent, at its next meeting May 3, Vitner and other economists predicted. That would mark the eighth quarter-point increase since June, when the rate was 1 percent.
"The modest gains in the core PPI during the past two months suggest that the Fed's tightening moves are working," Vitner said. "The Fed's work is not done, however."
Kevin Cummins, an economist with UBS Securities LLC, concurred, saying the last two months of core PPI increases provided relief after an 0.8 percent spike in January. "The bottom line is that the inflation picture looks less bleak than following the January PPI, but it is not yet really worry-free for the Fed."
Fed Board member Donald L. Kohn noted in a speech last week that commodity price increases have slowed recently and that futures markets are forecasting oil prices to level off and drop a bit. The dollar also has stabilized, which should limit import price increases, he said.
"But the indirect effects of these sorts of price increases are still a potential concern," because of the danger that businesses and consumers will develop self-fulfilling expectations of higher inflation, he said.
Kohn said the recent news on both inflation and expectations for it "suggests that inflation pressures will remain contained, but substantial uncertainty surrounds that outlook."