December 8, 2023

Wholesale Prices Fall Again, While Inflation Remains Low

The producer price index, which measures price changes before they reach the consumer, fell a seasonally adjusted 0.7 percent in April from March, the Labor Department said Wednesday. It was the second straight monthly decline and the steepest since February 2010.

Lower inflation means the Federal Reserve has more leeway to continue its aggressive policies to bolster economic growth. If there were signs that inflation was picking up, the Fed might be forced to raise interest rates.

The index declined largely because gas prices dropped 6 percent, and the price of home heating oil fell by the most in almost four years.

Food prices also fell 0.8 percent, the most since May 2011. Half of the decline was because of lower vegetable prices, a highly volatile category. Meat prices dropped 2.3 percent.

Excluding the volatile food and energy categories, core prices ticked up 0.1 percent in April, from March. Pharmaceutical costs also rose 0.1 percent.

Prices for cars and pickup trucks, men’s clothing, tires and computers all declined.

Over all, wholesale prices have increased just 0.6 percent over the last 12 months. That is the smallest yearly gain since July and down from a 1.7 percent pace just two months ago.

Core prices have risen only 1.7 percent in the last 12 months and are just below the Fed’s 2 percent inflation target.

Paul Dales, an economist at Capital Economics, said wholesale prices may fall further as declining prices for many commodities work their way through the supply chain. Slowing manufacturing output could also weigh on prices.

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Gasoline Lifts U.S. Producer Prices

The Labor Department said on Tuesday its seasonally adjusted index for prices received by farms, factories and refineries, increased 0.8 percent after being flat in August. Economists had expected prices to increase 0.2 percent.

Stripping out volatile food and energy, wholesale prices rose 0.2 percent after inching up 0.1 percent in August.

“Slower growth abroad suggests further moderation in demand for raw materials heading into the fourth quarter, which will likely translate into inflation moderation,” said Lindsey Piegza, an economist at FTN Financial in New York.

Prices for U.S. government debt trimmed gains on the data.

The dollar briefly pared gains against the euro, while stocks on Wall Street were lower as investors focused on Moody’s warning on France’s credit rating and slow growth in China.

Gasoline prices jumped 4.2 percent, the largest gain since March, after dropping 1 percent in August.

Economists, however, dismissed the spike in gasoline, saying it was attributed to how the data was adjusted to try to smooth seasonal volatility.

“It probably did not point to a new trend to higher inflation,” said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri.

But some said there was a risk that data on Wednesday could show an upside surprise in September consumer prices.

The consumer price index likely rose 0.3 percent last month, according to a Reuters survey, after increasing 0.4 percent in August.


The strong rise in wholesale prices last month is unlikely to spark a broad increase in inflation pressures given the weak economic environment.

It will probably have little impact on the Federal Reserve, which focuses on core consumer inflation, as it weighs further options to help the anemic recovery and pull down an unemployment rate stuck above 9 percent.

Pressure on the U.S. central bank for further monetary stimulus has lessened in recent weeks as retail sales and the trade balance data suggested economic growth accelerated in the third quarter after the second quarter’s tepid 1.3 percent annual rate.

Economists estimate gross domestic product grew at an annual pace of anywhere between 2.3 percent and 2.7 percent in the third quarter.

The economy’s improving tone is starting to filter through to the ailing housing market. Home-builder sentiment rose this month to its highest level in nearly 1-1/2 years, the National Association of Home Builders said in a separate report.

The NAHB/Wells Fargo Housing Market index rose to 18, the highest level since May 2010, from 14 in September. Economists had expected the index to only rise to 15.

Still it remained below 50, meaning more builders view market conditions as poor.

Last month, food prices rose 0.6 percent, slowing from a 1.1 percent rise in August.

In the 12 months to September, producer prices increased 6.9 percent, accelerating from August’s 6.5 percent advance.

Wholesale prices outside of food and fuel were bumped up by a 0.6 percent rise in light motor trucks — accounting for a third of the rise in the core PPI measure. Light trucks had risen 0.1 percent in August.

Passenger car prices fell 0.5 percent after slipping 0.4 percent in August. Disruptions to production wrought by the March earthquake in Japan caused car prices to spike early this year.

In the 12 months to September, core producer prices rose 2.5 percent after increasing by a similar margin the prior month. The rise was above economists’ expectations for a 2.4 percent advance.

(Additional reporting by Ellen Freilich in New York; Editing by Neil Stempleman)

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Retail Sales and Producer Prices Unchanged in August

Consumers spent less on autos, clothing and furniture in August, leaving retail sales unchanged, the government reported.

The Commerce Department also said retail demand in July was weaker than first thought.

Auto sales fell 0.3 percent in August. Sales at clothing stores declined 0.7 percent. Gasoline sales rose.

The flat reading for retail sales was a surprise, given private reports from retailers and auto dealers that suggested a brighter picture in August.

Major automakers reported healthy sales increases in August, largely because dealers introduced new models and offered cheaper financing. The nation’s major retailers reported solid results from the all-important back-to-school shopping.

A weak month for retail sales suggests growth may struggle to gain momentum in the second half of the year. Consumer spending accounts for 70 percent of economic activity in the United States.

Still, most categories were higher compared with a year ago. Auto sales were 6.9 percent higher than in August 2010, and clothing stores were 5.6 percent higher.

Also Wednesday, the Labor Department reported that companies paid the same amount for wholesale goods last month, as a drop in energy prices offset higher food costs.

Excluding the volatile food and energy categories, core wholesale prices edged up 0.1 percent, the smallest increase in three months. The figures indicate that inflation pressures are easing.

The Producer Price Index, which measures price changes before they reach the consumer, was unchanged in August, the Labor Department said, after a 0.2 percent rise in July.

Core prices rose 2.5 percent in the past 12 months, the same pace as July.

Food prices rose 1.1 percent in August, the largest increase since February. Wholesale gasoline prices, meanwhile, fell 1 percent in August, and home heating oil dropped 1.2 percent.

Sharp increases in the prices of oil, food and other commodities pushed up most measures of inflation earlier this year. But now that many commodities are becoming less expensive, inflation pressures are fading.

That has taken some of the pressure off the Federal Reserve to keep inflation in check by raising interest rates. Instead, the central bank can keep the short-term rate it controls at nearly zero, in an effort to support economic growth.

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As Costs Fall for Energy, Prices Drop for Producers

The Bureau of Labor Statistics report showed that its index of wholesale prices fell 0.4 percent in June, after a rise of 0.2 percent in May. The decline last month was the steepest since February of last year and exceeded analysts’ forecasts of a 0.2 percent drop.

The 2.8 percent decrease in energy prices was the largest drop in that category since a 4.7 percent decrease in July 2009. Prices for gasoline, which had been rising in the first part of the year partly because of turmoil in Arab oil-producing countries, moved down 4.7 percent, the department said. The decline in energy prices more than offset the rise in food, which was up 0.6 percent in June.

When the volatile food and energy prices are extracted from the overall index, the core Producer Price Index rose 0.3 percent in June after a 0.2 percent increase in May, making it the seventh consecutive monthly rise.

The core index has risen 2.4 percent in the last year, the government report said.

That the core price index rose was “somewhat of a relief,” especially to the Federal Reserve, said Cliff Waldman, an economist for the Manufacturers Alliance. “It is a sign we have gotten out of the deflationary danger zone.”

The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that a renewed threat of deflation was one condition that could cause the central bank to resume its economic aid campaign, called quantitative easing.

The data on producer prices was one in a series of reports on Thursday that showed the state of the economy.

In the week ended July 9, the number of initial claims for unemployment benefits was 405,000, a decrease of 22,000 from the revised figure of 427,000 in the previous week, according to the Department of Labor.

Economists said that over all the decline in the weekly number was a positive sign, at least for one week.

But a better gauge, they said, is the four-week average, which also fell but remained above 400,000, a benchmark for job growth.

“The rule of thumb is that whenever you have the four-week moving average that goes under that number, that usually is a sign associated with payroll growth,” said Gregory Daco, the principal United States economist for IHS Global Insight.

So despite the most recent week’s decline, the current numbers are “still indicating some weakness in the unemployment market,” he said.

The Department of Commerce reported that retail sales in the United States rose 0.1 percent in June, after a decline of 0.1 percent in May. The increase was partly a result of a rise in auto prices.

“On the auto retail sales side of things, it seems that the supply chain disruptions emanating from the mid-March earthquake in Japan are probably easing,” said Chris G. Christopher Jr., the senior principal economist for IHS Global Insight, in a research note.

Over all, he said, the economy still has a number of pressure points. Unemployment rose to 9.2 percent in June, according to the latest government report. The stock market is volatile, consumer confidence is depressed and home prices are still scraping the bottom.

“Consumers are fatigued,” he wrote. “The only real good news on the consumer side of the economy is that gasoline prices started to fall, but are still relatively high.”

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Energy Costs Lift Retail Sales and Producer Prices

Retail sales rose 0.5 percent in April, after a 0.9 percent increase in March. Excluding a 2.7 percent jump in gasoline sales reflecting higher prices, the increase in retail sales was a much smaller 0.2 percent.

Gasoline pump prices have been surging in recent months, with the nationwide average hovering near $4 a gallon. Economists are worried that higher fuel costs will leave motorists with less money to spend on other items, and that will slow the overall economy.

Sales at gasoline stations, which made up about 10.5 percent of total sales in April, increased 2.7 percent after rising 4.1 percent in March.

Higher energy costs helped push up prices paid by companies for raw materials and factory goods in April.

The Labor Department said that the Producer Price Index, which measures price changes before they reach the consumer, rose 0.8 percent last month. That was slightly above the 0.7 percent gain in March. Excluding the volatile food and energy categories, the core index increased 0.3 percent, the same as in March.

Over the last 12 months, the index has increased 6.8 percent, the biggest gain in nearly three years. Outside of food and energy, prices rose 2.1 percent, up from a 1.9 percent gain in March.

Turmoil in the Middle East and rising demand from fast-growing developing countries have pushed up the price of oil and gas since last summer. The prices of corn, wheat, cotton and other commodities have also increased because of strong global demand. That has raised worries among some economists that consumer prices could also rise and inflation could surge.

But some signs in recent days suggest that inflation pressures could cool in the coming months. Oil prices dropped on Thursday to nearly $96 a barrel on expectations that global demand would slow this year. The price was about $114 a barrel last week. Prices of corn and other grains fell on Wednesday.

Paul Dales, an economist at Capital Economics, said higher energy and agricultural commodity prices could push the 12-month increase in the Producer Price Index to 8 percent in the coming months. But he said it would be a temporary spike.

“With commodity prices now falling, both producer and consumer price inflation are likely to drop sharply in the second half of the year,” Mr. Dales said.

A separate report from the Labor Department showed that the number of people applying for unemployment benefits dropped last week, reversing nearly all the sharp rise reported the previous week.

The number of laid-off workers seeking benefits dropped 44,000, to a seasonally adjusted 434,000. That was the steepest weekly fall since February 2010.

The drop suggests that the increase of 47,000 reported last week was mostly because of temporary factors. Still, the latest applications figure is far above the 375,000 level typically consistent with sustainable job growth. Weekly applications peaked during the recession at 659,000.

The four-week average of claims, a less volatile measure, rose to 436,750, its fifth consecutive increase. The average has increased 46,500, or nearly 12 percent, since early April.

Many economists say a brighter outlook for hiring should blunt the impact of inflation. Companies have added 250,000 jobs each month, on average, in the last three months, the biggest hiring spree in five years. The unemployment rate has dropped nearly a full percentage point in the last five months.

More jobs are critical to increasing consumer spending, which accounts for about 70 percent of the economy.

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Fundamentally: Picking Stocks to Keep Ahead of Inflation

IF investor behavior foreshadows what’s in store for the economy several months down the road, inflation could be a bigger threat than government figures now suggest.

The current numbers paint a rather benign picture, as core inflation in the United States has been growing at a modest annual rate of 1.1 percent. Even when volatile food and energy prices are factored in, overall consumer prices rose just 2.1 percent over the year through February, the most recent period for which data are available.

Yet the market appears to be looking past this information. Since the end of December, investors have been pulling money out of mutual funds that invest in assets that fare poorly when inflation kicks up, like intermediate-term bonds and cash, according to an analysis of fund flows by Bank of America Merrill Lynch Global Equity Research.

At the same time, they’ve been pouring money into funds that invest in traditional inflation plays. Those include Treasury inflation-protected securities, commodities and, of course, stocks. Equity funds alone have drawn $30 billion in net inflows since the end of December, according to the Investment Company Institute, the fund industry trade group.

Of course, there is still a debate over whether these shifts make sense. Worrisome levels of inflation may not materialize at all. Economists at IHS Global Insight, for example, are forecasting that consumer prices will grow at only around 2 percent a year from 2012 through 2014. They say they believe that wage growth will be muted in a sluggish job recovery.

But some strategists are bracing for an inflation jump. Jason Hsu, chief investment officer at Research Affiliates, a consulting firm in Newport Beach, Calif., said he expected the numbers to rise in a little more than a year from now. “We’re talking about inflation hovering in the 4 percent area,” he said, with a risk of it moving even higher. He pointed to the flood of stimulus that’s been pumped into the economy by governments throughout the world. Some central banks overseas have already reversed course and are raising rates to keep a lid on prices. The European Central Bank made such a move last week, citing worrisome levels of inflation in food and energy costs. Even if Mr. Hsu is right, though, there is still the question of how effective stocks will be in protecting portfolios amid rising consumer prices.

Historically, stocks have been regarded as a decent inflation hedge — at least relative to bonds and cash — because stock returns have outpaced inflation for most of the past century.

Yet it’s not always the case. Ned Davis Research, based in Venice, Fla., recently analyzed how the market performed in different inflationary environments over the past four decades. While the Standard Poor’s 500-stock index posted double-digit gains, on average, when inflation has been between 1 percent and 4 percent, stocks fell at an annualized rate of 1.4 percent when inflation jumped to between 4 percent and 9 percent.

What’s more, in periods when the inflation rate is accelerating, not all types of stocks perform the same way. Sam Stovall, chief investment strategist at Standard Poor’s Equity Research, looked at periods since 1970 when the year-over-year change in the Consumer Price Index was accelerating. He found eight such sustained periods, and saw that half of the 10 market sectors, on average, gained ground during those times; the others declined or were flat.

Which types of equities are likely to outperform if inflation starts to heat up this time?

Mr. Hsu says he thinks large, domestically based multinational companies would look attractive if inflation really took off and the dollar continued to weaken against other major currencies. Although a weaker dollar would effectively raise the cost of goods imported from overseas, it would lower prices for exports, thus benefiting the American multinationals.

Another promising area is dividend-paying stocks, said Kate Warne, investment strategist at Edward Jones in St. Louis. Since 1947, payouts issued by the S. P. 500 companies have grown at an annual rate of 5.6 percent, she said, outpacing the 3.7 percent inflation rate during the period.

BUT there is another reason to favor dividend payers, she said. Businesses that stand to thrive during inflationary periods are those that have the power to pass along price increases to their customers. And companies with growing dividends often have that ability. “When you think about it,” she said, “companies that have pricing power — and are thus able to maintain their profit margins — will be able to continue to raise their dividends.”

Brad Sorensen, director of market and sector analysis at Charles Schwab, said pricing power might be focused in certain sectors. Historically, “energy companies have proven they can raise prices pretty quickly at the pump if oil climbs,” he said. “On the other end of the spectrum, consumer companies have a hard time passing along price increases on things like clothes because there’s so much competition.”

If inflation spikes, energy has proved to be a good place to hide. But if the discussion moves from rising inflation to hyperinflation, other defensive areas of the market like health care and utilities would seem to make sense, Mr. Stovall said. After all, no matter how expensive things become, people still need to see the doctor and turn on the lights. 

Paul J. Lim is a senior editor at Money magazine. E-mail:

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