Sat, 11 Sep 1999,,U.S. August Core PPI Falls For 2nd Time in 3 Months; Eases Inflation Fear
By Vince Golle
U.S. Economy: August Prices Ease Inflation Concerns (Update2)
(Adds other stock markets.)
Washington, Sept. 10 (Bloomberg) -- Prices paid to U.S.
producers for goods other than food and energy fell in August for
the second time in three months, suggesting inflation is tame
enough to dissuade Federal Reserve officials from raising
interest rates.
The core producer price index fell 0.1 percent last month
after showing no change in July, the Labor Department said. The
overall index rose 0.5 percent in August, after increasing 0.2
percent the previous month. The higher-than-expected overall gain
reflected increases in food and energy products.
Bonds rose after the report. ''Inflation remains minimal,''
said Peter Kretzmer, an economist at Banc of America Securities
in New York. ''For the Fed,'' which has raised interest rates
twice this year, ''this is decidedly positive news.''
Today's price news is the latest to suggest inflation isn't
threatening. Last week, the government's August employment report
showed average hourly earnings rose a smaller-than-expected 0.2
percent. Yesterday, the Labor Department said August prices of
imports other than oil were unchanged for a second straight
month.
Still, an acceleration of prices for raw materials and
partially finished goods could suggest higher inflation down the
road. The cost of intermediate goods -- products like paperboard,
engines and gypsum wallboard -- increased 0.8 percent in August,
the largest rise since a 1.1 percent gain in January 1995.
''This is not an immediate threat, but it will be a problem
in three or four quarters if the economy doesn't slow soon,''
said Christopher Low, chief economist with First Tennessee
Capital Markets.
Markets
Through the first eight months of this year, intermediate
goods prices increased at a 4 percent annual rate, the biggest
such rise since a 5.2 percent pace in January-August 1995.
Investors focused on the unexpected decline in the PPI's
core rate. The government's 30-year benchmark Treasury bond rose
29/32, pushing down the yield 6 basis points to 6.03 percent. The
implied yield for the federal funds futures October contract fell
1 basis points to 5.33 percent. Stocks were mixed, with the
Nasdaq composite index up 1.2 percent to a record 2886. 96, the
Standard & Poor's 500 up 0.3 percent, and the Dow Jones
Industrial Average down 0.5 percent.
The core rate drop reflected declines in the costs of
passenger cars, light trucks, computers and medical equipment.
Manufacturers such as Intel Corp. and General Motors Corp.
keep cutting prices and offering rebates. Intel, the world's
largest computer chipmaker, cut prices on its Pentium II and
Celeron processors for laptop computers by as much as 43 percent.
No. 1 automaker GM announced last month it is offering
rebates of up to $1,000 on its 1999 Chevrolet Silverado and GMC
Sierra full-size pickups.
Fed policy-makers meet next on Oct. 5 to decide whether to
raise interest rates a third time this year to guard against
rising inflation. The Fed's Open Market Committee raised interest
rates by a total of one half of a percentage point in two steps
in June and August.
Fed Speeches
In several speeches this week, Fed officials indicated they
were unsure how much a threat inflation was to the economy now.
''The underlying inflation rate is stabilizing, after a
period of decline, without any evidence of a broad-based upturn
in inflation,'' Fed Governor Laurence Meyer said in Philadelphia
on Wednesday.
Today's report also showed that the core rate of the PPI has
fallen at a 0.4 percent annual rate so far this year, compared
with an increase of 1.4 percent through August 1998. For the year
to date, the overall PPI has risen at a 2.3 percent annual rate
compared with a decline of 1.3 percent through August 1998.
Oil Prices
Wholesale prices for energy products, including unleaded
gasoline, heating oil and natural gas, advanced 3.7 percent after
a 3.4 percent July gain.
Oil prices could rise to $25 a barrel or more, as long as
the Organization of Petroleum Exporting Countries holds firm to
its promises to restrain production, oil analysts and economists
said.
Prices already are up 90 percent this year. And while
production is in check, demand will rise 2.5 percent next year,
as economic growth in Asia improves, according to the Paris-based
International Energy Agency.
OPEC members have said they don't want prices to go too high
for fear of encouraging high-cost producers to reopen wells they
shut when prices fell to 12-year lows in December. Oil sold for
on average more than $19 a barrel in the five years before 1997,
when a glut sent prices plunging.
Food, Raw Materials
Food prices increased 0.4 percent, the third rise in the
last four months, reflecting higher pork and dairy prices, the
report showed. Hot, dry weather that damaged crops during the
month.
The increase in food prices helped boost the cost of crude
goods, or raw materials. Prices rose 4.6 percent, reflecting more
expensive corn and soybeans. Excluding food and energy, raw
materials prices rose 1.8 percent.
The September producer price index is expected to rise,
reflecting increases for tobacco. Philip Morris Cos., the world's
largest tobacco company, raised U.S. cigarette prices by 18 cents
a pack effective Aug. 30. The 11 percent increase is aimed at
boosting profit and paying for rising taxes and legal-settlement
payments.
The second largest cigarette maker, R.J. Reynolds Tobacco
Holdings Inc., said it raised its wholesale prices by the same
amount. The price increases mark the sixth in the past 20 months. |
