Wholesale prices in the US fell in February more than anticipated, led by a drop in fuel costs and signaling there are few inflation pressures building in the early stages of the economic recovery.
The 0.6 per cent decrease in prices paid to factories, farmers and other producers was the biggest since July and followed a 1.4 per cent January increase, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices climbed 0.1 per cent.
Companies will probably continue to hold the line on prices as the expansion has yet to soak up enough excess capacity or create jobs. The report bears out forecasts by Federal Reserve policy makers, who yesterday retained a pledge to keep the main interest rate near zero for an "extended period," and said "inflation is likely to be subdued for some time."
"Disinflation is going to be with us for a while," Julia Coronado, a senior US economist at BNP Paribas in New York, said in a Bloomberg Radio interview. "That's going to allow the Fed to stay on hold for a lot longer than the market is expecting."
Bigger Drop
Economists forecast a 0.2 per cent decrease in February producer prices, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from a drop of 0.6 per cent to a 0.5 per cent increase.
Prices excluding food and energy were forecast to rise 0.1 per cent after a 0.3 per cent gain the month earlier, according to the survey median.
Compared with a month earlier, energy costs dropped 2.9 per cent in February, led by diesel fuel and gasoline. The cost of food increased 0.4 per cent
An increase in wholesale auto prices pushed core costs higher. The measure was restrained by a drop in the cost of capital equipment, led by declines in construction machinery and a record decrease in prices of office furniture.
Producer prices are one of three monthly inflation measures reported by the Labor Department. The cost of imported goods decreased 0.3 per cent in February, the government said yesterday. It is scheduled to release the consumer price index tomorrow.
Fed Policy
Fed policy makers yesterday gave no hint they were preparing to raise the target interest rate on overnight loans between banks any time soon. Low levels of capacity use, high unemployment, tame inflation and stable expectations on the likely trajectory of prices were among the "economic conditions" the central bankers cited for the lack of urgency.
The Fed has kept the federal funds rate target for overnight loans in the zero to 0.25 per cent range since December 2008. Policy makers began using the "extended period" language in March 2009 and have repeated it at each meeting since.
Producer prices were up 4.4 per cent compared with a year earlier, down from a 4.6 per cent gain in the 12 months to January.
Core producer prices climbed 1 per cent from February 2009, matching January's year-over-year increase.
Fuel Costs
A jump in petroleum costs since early last year may keep year-over-year comparisons elevated in coming months. The price of a barrel of crude oil traded on the New York Mercantile Exchange averaged $US76.45 last month. In February 2009 it averaged $US39.26.
Consumers in the Reuters/University of Michigan preliminary survey, released March 12, said they expect an inflation rate of 2.7 per cent over the next five years. Those figures are tracked by Fed policy makers as well.
After expanding at a 5.9 per cent rate in the fourth quarter, the fastest pace of growth in four years, economists surveyed by Bloomberg News earlier this month anticipate the world's largest economy will grow at an average 2.75 per cent rate in the first half of this year, less than previously projected.
The analysts also lowered inflation estimates. The Fed's preferred price measure, which tracks consumer spending and excludes food and fuel costs, will probably rise 1.2 per cent this year, according to this month's survey, the smallest gain since 1962. The central bank's long-term forecast for the gauge calls for gains in a range of 1.7 per cent to 2 per cent.
Spare Capacity
Low capacity utilization may also be helping companies refrain from raising prices. Plant use was 72.7 per cent in February, according to a Fed report released March 15. The gauge averaged 80 per cent over the past 20 years.
Royal Ahold NV, the owner of Stop & Shop supermarkets, is among companies keeping prices low to entice cash-strapped US shoppers contending with an unemployment rate near 10 per cent.
Chief Executive Officer John Rishton began cutting prices, lowering costs and refurbishing stores in the US two years ahead of competitors like Supervalu and Kroger Co. That boosted sales and profitability at Ahold's U.S. chains, which account for more than half of the Amsterdam-based company's revenue. Food prices will continue to fall during the first half of this year, Rishton said earlier this month.
