Falling prices for gasoline, home heating oil and food combined last month to cause an unexpected 0.1 percent decline in the producer price index, but prices for new cars and prescription drugs were noticeably higher, the Labor Department reported yesterday.
The small drop in the PPI, which measures changes in the prices producers charge when they first sell a completed product, followed a large 1.1 percent increase in September. That rise was the result of increases in energy, food, tobacco and new-car prices.
Many analysts were eager to see the latest report on prices because it will be the last issued before Federal Reserve policymakers meet Tuesday in an atmosphere of considerable uncertainty to consider whether to raise interest rates to keep inflation under control. As has been the case with a number of other recent reports, analysts were divided over how the PPI figures would influence the Fed.
The key inflation concern raised by the report was a 0.3 percent increase in the "core" portion of the index, which excludes volatile food and energy prices. In September, the core PPI rose a sharp 0.8 percent, principally because of higher new car prices and the largest increase in tobacco product prices in history.
Over the past 12 months, the overall PPI is up 2.7 percent, largely because of such energy and tobacco price increases. The core PPI is up 1.9 percent, compared with 1.7 percent in the year ended in September.
"The core PPI data is where [financial] market participants should be focused, as this index will concern Fed policymakers," said Dana Saporta, an economist at Stone & McCarthy Research Associates, a financial markets research firm. "These data bolster our view that the best news in core inflation is behind us.
"While we continue to characterize it as a tough call, we are sticking by our forecast that the Federal Open Market Committee will vote" to raise its target for overnight interest rates by a quarter-percentage point, Saporta said. The FOMC is the central bank's top policymaking group.
In contrast, Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd. in Valhalla, N.Y., noted that except for drug and new-car prices, the "core PPI was flat."
"The question the Fed has to ask is whether these increases are symptomatic of a wider emerging problem. We think not, but this report muddies the waters for the FOMC," he said.
Even with last month's 1.1 percent increase in passenger-car prices, which came on the heels of a 2 percent rise in September, producer prices for cars were only 0.3 percent higher than they were in October 1998. In addition, September and October price changes are hard to interpret because of large swings in seasonal adjustment factors related to the annual introduction of new models.
Normally the prices automakers charge their dealers decline in September as incentives are offered to encourage customers to buy the older-model cars. This year such incentives came earlier, so that prices didn't fall as much as usual in September. That meant that on a seasonally adjusted basis, they were reported as increasing 2 percent.
The October figures cover the new 2000 models, which rose in price by 7.4 percent, up from a usual increase of around 6 percent. The seasonally adjusted increase was 1.1 percent.
Both the September and October increases were larger than they were last fall, but that doesn't mean they necessarily will cause a big jump in actual sale prices as dealers find customers for the new models.
"Based on the recent decline in auto sales and weakness in used-car prices, that increase in auto prices is unlikely to continue," said economist Nancy Lazar at International Strategy and Investment Group in New York.
The 1.2 percent rise in prescription drug prices followed two months of 0.1 percent increases, leaving drug prices 1.7 percent higher than in October 1998.
Meanwhile, gasoline prices fell 3.8 percent after three months of sizable increases. Home heating oil was down 5.5 percent, and the cost of electric power dropped 0.5 percent.