Energy, Food Put Producer Prices Up 0.3%

Food and energy costs misbehaved in August, but other wholesale prices declined, raising hopes on financial markets that the Federal Reserve Board may hold off on raising interest rates.

The Labor Department reported Thursday that its producer price index, which measures price pressures before they reach the consumer, was up 0.3% in August, the biggest gain in five months.

That reflected a big jump in energy prices, which had been falling for three months, and a gain in food costs spurred by a big jump in beef and pork prices.

Outside of food and energy, prices fell by 0.1% in August. It was the first decline in the so-called core rate since March.

Wall Street, increasingly jittery lately because of fears that the Fed is about to start boosting interest rates, chose to concentrate on the good news in the PPI report, which triggered a big rally in both bond and stock markets.

Despite the financial market euphoria, many economists said they still expect the Fed will raise interest rates when its policymakers next meet Sept. 24.

“I think the markets are engaged in a bit of wishful thinking,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “The handwriting is on the wall. A quarter-point hike by the Fed in interest rates on Sept. 24 is still quite likely.”

The Fed’s rate-setting Federal Open Market Committee meeting is its last session before the November elections.

Some analysts said the Fed might still decide to hold off on any rate hikes until after the elections, especially if today’s report on consumer prices is better than expected. Economists believe the report will show gains of 0.2% overall and 0.2% excluding food and energy.

For the year as a whole, the PPI has been rising at an annual rate of 2.1%, little changed from last year’s 2.2% increase. Through August, the core rate has been rising at an annual rate of just 0.6%.

“Except for the period of the cigarette price wars in 1993, this is the lowest core wholesale rate ever measured,” said Bruce Steinberg, senior economist at Merrill Lynch in New York.

“Despite continuing inflation fears, broad inflation indicators remain totally benign.”

A separate report on weekly jobless claims also hinted that the economy might be slowing. New claims for benefits rose by 21,000 last week, more than reversing a decline of 13,000 the week before. The increase pushed total claims to 328,000, their highest level in two months.

The 0.3% increase in the overall PPI, following no change in July, was the biggest one-month advance since a 0.5% rise in March, which also occurred during a period when energy prices were rising rapidly because of winter-induced supply shortages.

Analysts said the 0.7% rise in energy prices, which followed three straight monthly declines, is probably the beginning of a series of energy price increases as world oil markets respond to the latest tensions with Iraq.

Wholesale gasoline prices rose 0.9% and home heating oil was up a steep 4.1%.

Food costs were up 1%, reflecting price increases of 4.9% for beef, 8.7% for pork and 1.7% for fruit.

However, vegetable prices were down 11.9% as the cost of radishes, cucumbers and cabbages all posted big declines.

Outside of food and energy, prices for passenger cars dipped 0.2% in August, the second straight decline, and tobacco products dropped 0.2% as well. Wholesale prices also declined for clothing, footwear, prescription drugs and electronic equipment.

Price increases were moderate at earlier stages of production, with intermediate material prices and crude material prices both edging up just 0.2%.