Inflation Index Declines Sharply
Prices paid to U.S. producers fell in July at the fastest pace in nearly eight years, led by a huge decline in energy prices, the government said Friday, bolstering the view that inflation is under wraps.
The producer price index, a closely watched gauge of wholesale inflation, tumbled 0.9% last month after falling 0.4% in June, the Labor Department said. It was the biggest drop in the PPI since a 1% decline in August 1993 and was led by the largest decrease in energy prices in nearly 12 years.
Excluding the more volatile food and energy sectors, the so-called core PPI rose 0.2% in July after posting a 0.1% increase in the prior month. Analysts said the core number was pushed higher by a 2.3% rise in sales of light trucks--a category that includes sport-utility vehicles--the biggest increase in more than 14 years.
The overall PPI fall was much steeper than economists on average had estimated, while the core rose faster than expected. Economists had forecast that the PPI fell 0.3% while the core rose 0.1%.
Despite the core increase, analysts said the report painted a welcome, mild inflation picture.
“There’s great news here,” Christopher Low, chief economist at First Tennessee Capital Markets in New York, said. “This is the good inflation news that we’ve been promised by the Fed for more than a year.”
The report should help ease inflation concerns for the Federal Reserve as it heads into its policy-setting Federal Open Market Committee meeting Aug. 21, economists said.
The central bank is widely expected to cut rates for the seventh time this year, this time by a quarter-percentage point at the meeting. Modest inflation gives the Fed space to cut rates without the fear of igniting price pressures.
“This report certainly plays into an easing scenario. This gives the Federal Reserve room to cut rates however it sees fit this month,” Carol Stone, deputy chief economist at Nomura Securities International in New York, said, adding that she expects a quarter-percentage-point reduction at the meeting.
Inflation-sensitive U.S. Treasury security prices rose as the report, combined with worries the U.S. economy has not stopped sliding, convinced investors more Fed rate cuts are on the way.
Over the last year, producer prices have risen 1.5%, down from the 2.5% annual rate recorded in June, the government said. The increase in July was the smallest 12-month gain since a matching 1.5% rise measured in July 1999.
The report also suggested that inflation in the pipeline--measured by prices of intermediate and crude goods--is under control. Prices of intermediate goods less food and energy were down 0.4% in July, the biggest decline on record. Prices of crude goods less food and energy were down 0.9%. The decline in the overall PPI in July was led by a massive 5.8% fall in energy prices, the largest drop since a 7.8% decrease in August 1989.
Gasoline prices plunged 17.7% in July, the biggest drop in 15 years, Labor said. The decline in gasoline prices more than compensated for a 2.2% gain in residential electricity prices. That was the largest climb since January 1999 when electricity prices rose 2.6%.
Food prices fell 0.6% in July as declines in prices for beef, chicken and fresh fruits and vegetables more than offset a rise in pork prices. The decline in July followed a 0.1% gain in June and was the largest since April 1999.
Car prices fell 0.3% in July, the biggest drop since February, after rising 0.1% in the previous month.
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Producer Prices
Index of finished goods prices; 1982=100; seasonally adjusted:
Source: Bureau of Labor Statistics
