A closely watched measurement of prices paid to producers fell in August, according to a government report released yesterday, which analysts took as a sign that inflation remains tame.
Overall, the Labor Department's producer price index for finished goods other than food and energy fell 0.1 percent last month, for a year-over-year increase of just 1.3 percent, which economists said was benign.
Economists and investors focused on this core PPI rather than the overall PPI, which rose a larger-than-expected 0.5 percent in August, largely because of sharp spikes in the prices of gasoline, pork, soft drinks and other food and energy items. Year over year, the PPI, which measures the prices producers get for finished products before they reach consumers, is up 2.3 percent.
"The latest numbers on inflation look a little better than what we saw earlier in the summer, and it really makes the case that after a little hiccup, inflationary pressures appear to be subsiding," said Mark Vitner, vice president and economist at First Union Capital Markets in Charlotte. "That would make it tough for the [Federal Reserve] to raise [interest] rates in October."
Vitner noted that without a big increase in tobacco prices late last year, which was driven by the cost of settling anti-tobacco lawsuits, the core PPI would be up just 0.7 percent year over year.
The Fed, which has raised its target for short-term interest rates a half a percentage point this summer, meets next on Oct. 5. Economists and market analysts have been closely monitoring economic indicators for any signs of the sort of resurgent inflation that might provoke the Fed to raise rates again.
Oil prices have been on an upward climb since the Organization of Petroleum Exporting Countries agreed last March to limit worldwide oil production. Prices paid to producers of gasoline jumped 9.1 percent in August.
Food prices at the producer level rose 0.4 percent, after plummeting 0.9 percent in July. In an illustration of the monthly swings common in the weather-driven food sector, corn was up 25.7 percent in August, the largest increase since 1988. But that increase followed a 16.7 percent drop in July, and corn prices are still down 1.2 percent year over year.
Items driving prices down included computers, whose producer prices have fallen all year, and passenger cars and trucks, whose prices at the manufacturer level have fallen in each of the past three months.
While the PPI for finished goods showed little inflation, the story was different farther back down the manufacturing pipeline. The PPI for core intermediate goods--examples include semiconductor chips and automobile glass, which eventually wind up in finished computers and automobiles--rose at an annual rate of 4.3 percent in June, July and August.
Although the PPI provided some reassuring news on inflation, economists noted the Fed will be watching more closely for the release Wednesday of figures from the consumer price index, which is also expected to be bumped upward by rising gasoline prices. The CPI also includes the price of services, such as health care, financial services and transportation, which account for about half of what consumers buy and are excluded from the PPI.
"The PPI is still at or near the bottom of the Fed's worry list," said Oscar Gonzalez, an economist with John Hancock Mutual Life Insurance Co. "[Federal Reserve Chairman Alan] Greenspan will glance at this report, but his concern is focused on jobs, wage pressures, productivity and the CPI."
CAPTION: In Check (This graphic was not available)