Producer Prices Jump 1% on Energy Costs

Soaring energy costs pushed U.S. producer prices up by twice as much as expected in July, government data showed Wednesday, with core prices excluding food and energy also flashing a warning of future inflation.

The Labor Department said the producer price index rose 1% last month. Prices for finished energy goods jumped 4.4%, the biggest rise since October 2004, while finished consumer food prices fell 0.3%.

Excluding those volatile areas, so-called core producer prices climbed 0.4%.

“There are pipeline inflation pressures out there. Business pricing power continues to rise as the economy grows above trend, and there are upside risks going forward that eventually will show up,” said Morgan Stanley economist Ted Wiesman.

Wall Street economists had expected overall producer prices to rise 0.5%, with core prices up 0.1%.

One reason for the high reading on core prices was the effect of car and SUV prices, up 1.5% and 1.4%, respectively, in July. A Labor Department official said that with these stripped away, core prices rose 0.2% in July.

“The PPI car and truck survey has been extremely volatile. You should really be looking at PPI excluding energy, food and vehicles,” said Wiesman.

The producer price index, a gauge of prices received by farms, factories and refineries, followed a steady reading in June. But over the last 12 months, producer prices have climbed 4.6% overall and 2.8% stripping out food and energy.

This was the fastest rise in core prices since a matching 2.8% increase over the 12 months ended November 1995.

“We are seeing some pricing pressure on the wholesale level, but the [consumer price index] report yesterday showed that it hasn’t really passed on to the consumer level,” said Anthony Chan, senior economist at J.P. Morgan Asset Management.

The Labor Department said Tuesday that June consumer prices rose 0.5% but were up a much milder 0.1% excluding food and energy costs.

Oil prices have surged to record levels, averaging $12 more a barrel for the full year than in 2004.

But tight conditions in sectors in which growth has been particularly strong are leading prices higher, said Gary Thayer, chief economist at AG Edwards & Sons.

For instance, floor covering prices were up 6.9% in July compared with the same month last year while household furniture advanced 3.6%, Labor Department data showed.

Thayer said this showed that core wholesale prices were feeling the heat of strong growth, although he did not think there was any reason to get alarmed overall about inflation.

“We do have some signs of the strong economy feeding into prices. But overall, inflation is still contained,” he said.