U.S. Producer Prices Surge More Than Forecast in July

By Timothy R. Homan

Aug. 19 (Bloomberg) -- Prices paid to U.S. producers rose twice as much as economists had forecast in July, reflecting the jump in energy and commodity costs that has since started to wane.

The 1.2 percent increase in the producer price index followed a 1.8 percent increase the prior month, the Labor Department said today in Washington. Costs were up the most in 27 years from a year before. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June.

Oil prices have dropped 21 percent since the start of last month, copper is down 15 percent and corn has dropped 14 percent, helping ease the cost pressures on companies. Federal Reserve officials anticipate the economic slowdown, along with a stabilization in commodity costs, will help contain inflation.

``It's not a pretty number,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``Today's PPI is a bit of an echo and maybe a little bit of a rude reminder of how much of a problem inflation was in July.''

Another government report showed builders in the U.S. broke ground in July on the fewest houses in 17 years, signaling the residential-construction slump will continue to hurt economic growth.

Treasuries were little changed after the reports, with benchmark 10-year notes yielding 3.80 percent at 8:37 a.m. in New York, from 3.82 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index were down 0.9 percent at 1,270.20.

Housing Starts

The 11 percent decrease in housing starts to an annual rate of 965,000, the lowest since March 1991, followed a 1.084 million pace the prior month, the Commerce Department said today in Washington. Building permits, a sign of future construction, also fell.

Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent following a previously reported 1.8 percent increase the previous month, according to the median of 77 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 1.8 percent.

Core prices were projected to rise 0.2 percent, according to the survey median.

Producers paid 9.8 percent more for goods from July 2007, the biggest year-over-year gain since June 1981, compared with a 9.2 percent gain in the 12 months ended in June. Excluding food and energy, the increase was 3.5 percent from a year earlier, its biggest jump since 1991, compared with a 3 percent gain in the prior month.

Gasoline

Producers paid 0.2 percent less for gasoline, and diesel fuel gained 2.6 percent, the report showed. Natural gas costs were up 7.8 percent from the previous month.

The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, a barrel of crude oil cost $138.74 on the New York Mercantile Exchange for July, up from $131.31 the previous month.

August producer prices are likely to reflect this month's drop in the cost of oil, which traded at $112.11 a barrel earlier today. Oil futures prices reached a record $147.27 a barrel July 11.

Food was 0.3 percent more costly, after a 1.5 percent increase the previous month, today's report showed.

Prices for raw materials, or so-called crude goods, increased 4.2 percent, after a 3.7 percent rise the prior month.

Inflation Outlook

Fed policy makers in their statement on Aug. 5 indicated that they expect inflation will moderate in the second half of the year and into 2009. Still, the outlook for prices is ``highly uncertain,'' the central bank's Federal Open Market Committee said in a statement when it voted to keep its benchmark interest rate at 2 percent.

Today's report showed passenger car prices gained 1.4 percent and light trucks increased 0.8 percent.

The report also showed prices for capital equipment increased 0.8 percent. Consumer goods prices were up 1.2 percent.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import prices rose 1.7 percent in July and consumer prices increased 0.8 percent for the same period, the Labor Department said last week. Both figures were higher than estimated.

Higher raw-material costs are outpacing price increases for some companies. Deere & Co., the world's largest maker of farm equipment, last week said higher prices for tractors and combines weren't enough to counter a $140 million increase in production costs for materials such as steel.

``Escalating raw-material costs are expected to have an impact on margins'' for the fourth quarter, the Moline, Illinois- based company said last week in a statement.

Hershey Co., the largest U.S. chocolate maker, on Aug. 15 said it will raise prices to counter higher commodity costs. The changes will result in a roughly 10 percent increase across Hershey's entire U.S. product line, the company said in a statement.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net