The Labor Department said on Wednesday a drop in natural gas and gasoline costs held back its seasonally adjusted producer price index. Analysts polled by Reuters had expected a 0.3 percent increase.
But it was the weakness in the index outside of volatile energy and food components that could garner more attention from Fed Chairman Ben Bernanke, who said last month the Fed might not end a bond-buying stimulus program until inflation begins to trend higher.
These so-called “core” prices, which are seen as indicators of trends in inflation, rose 0.1 percent during the month, below the 0.2 percent gain expected by analysts in a Reuters poll.
“The lower inflation trend could convince Fed officials to go slow on tapering (bond purchases),” said Kevin Logan, an economist at HSBC in New York.
The report helped push yields lower on long-term U.S. government debt, suggesting investors saw it as a sign the Fed might keep the major economic stimulus program in place for longer. U.S. stock prices edged lower.
Inflation has been cooling 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.
Wednesday’s data showed the core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected that reading to fall to 1.4 percent from 1.7 percent in June.
Low inflation is worrisome because it can encourage businesses and consumers to delay purchases. This undermines the Fed’s efforts to boost consumption by lowering borrowing costs.
Central bankers also fear extremely low inflation because it raises the risk a major shock to the economy could send prices and wages into a downward spiral known as deflation. Bernanke pointed out this risk in July.
However, policymakers at the Fed have argued that temporary factors could be behind some of the weakness in inflation. Many private sector economists agree.
A steady fall in the unemployment rate appears to have the Fed nearly ready to begin unwinding its bond-buying stimulus program.
Many economists expect the Fed will begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages, although another report on Wednesday showed mortgage rates fell slightly last week.
(Reporting by Jason Lange; Editing by Chizu Nomiyama and Nick Zieminski)
Article source: http://www.nytimes.com/reuters/2013/08/14/business/14reuters-usa-economy.html?partner=rss&emc=rss