Tame Prices Keep a Lid on Inflation

Prices paid to U.S. producers rose less than expected in May, the government said Thursday, a sign of tame inflation that gives the Federal Reserve room to lower interest rates and boost economic growth.

The producer price index rose 0.1% last month, restrained by lower costs for food, automobiles and computers, the Labor Department said. The index’s core rate, which excludes food and energy, rose 0.2%. Without an increase in cigarette costs, prices would have declined last month.

Separate government reports showed that business declined for a second straight month in April and claims for unemployment benefits held last week at close to a nine-year high. Together, they underscore weakness in the economy that may lead the Fed to reduce its benchmark interest rate for a sixth time this year.

“There are no inflation worries that stand in the way of the Fed cutting the federal funds rate yet one more time,” said Kenneth Mayland, chief economist of Clear View Economics in Pepper Pike, Ohio.

Analysts expected a 0.3% rise in May producer prices after a similar increase in April index. The core rate rose 0.2% in April.

Fed officials meet June 26-27. Central bankers cut the overnight bank lending rate to a seven-year low of 4% last month.

The economy grew at a 1.4% annual rate between October and March, the weakest six months since the second and third quarters of 1991.

Sales at U.S. factories, wholesalers and retailers declined 0.5% in April after a 0.6% decrease, the Commerce Department said Thursday. As a result, companies had trouble reducing stockpiles of unsold merchandise. Inventories at businesses were unchanged in April.

The inventory-sales ratio, a measure of how long goods remain unsold, rose to 1.44 months, the highest since January 1999.

The Labor Department reported that initial jobless claims fell to 428,000 for the week ended June 9 from 440,000 a week earlier. It was the first decrease in five weeks and left claims close to the highest since July 1992.

The four-week moving average for jobless claims, which takes out some of the volatility in the weekly figure, rose to 424,500 last week from 415,500. The average was the highest since August 1992.

The government’s report on inflation showed food prices fell 0.4% in May after a 0.6% increase during April.

Cigarette prices rose 5.6%, and excluding that increase, the producer index would have dropped 0.1%, the report said.

Passenger car prices fell 0.1% in May and the costs of light trucks declined 1.6%. Prices for computers decreased 1%, following a 1.5% gain in April.

Energy prices rose 0.2% in May, led by higher gasoline, residential electricity and heating oil costs, after rising 0.1% during April. The cost of liquefied petroleum gas, such as propane, declined.

The U.S. average wholesale price for regular unleaded gasoline rose as high as $1.121 a gallon on May 24, up from $1.094 a gallon at the end of April.

Producer electricity prices rose 0.7% last month following a 0.2% increase in April.

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Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

May: 142.2

Source: Bureau of Labor Statistics