March 28, 2024

With Energy Costs Lower, Producer Prices Were Flat in July, Evidence of Little Inflation

The Labor Department reported on Wednesday that a drop in natural gas and gasoline costs left its seasonally adjusted producer price index unchanged for the month. Analysts polled by Reuters had expected a 0.3 percent increase.

But the very slight increase in the producer price index outside of the volatile energy and food sector components is likely to attract attention at the Federal Reserve, which has recently noted the risks to the economy from inflation that is too low.

The so-called core producer prices, which are seen as indicators of trends in inflation, rose just 0.1 percent during the month, below the 0.2 percent gain expected by analysts.

Inflation has been trending lower for much of the last year despite signs of growing strength in the economy and the Fed warned last month that low inflation could hurt the economy.

The data on Wednesday showed that the core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected a 1.4 percent annualized increase, down from 1.7 percent in June.

The Fed is concerned about low inflation because it can encourage businesses and consumers to put off purchases in anticipation of lower prices. This undermines the Fed’s efforts to increase consumption by lowering borrowing costs.

Policy makers are also concerned about extremely low inflation because it raises the risk that a major shock to the economy could send prices and wages into a downward spiral known as deflation. Ben S. Bernanke, the Fed chairman, pointed out this risk in July.

But Mr. Bernanke has argued that temporary factors could be behind some of the low inflation and many private sector economists agree.

A steady decline in the unemployment rate appears to have the Fed nearly ready to begin winding down its economic stimulus program, which has kept interest rates historically low. The Fed has been buying $85 billion in Treasury and mortgage-backed securities each month.

A number of economists expect the Fed to begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages.

Article source: http://www.nytimes.com/2013/08/15/business/economy/with-energy-costs-lower-producer-prices-were-flat-in-july-evidence-of-little-inflation.html?partner=rss&emc=rss