U.S. Producer Prices Drop 0.9%, More Than Forecast

By Shobhana Chandra

Sept. 12 (Bloomberg) -- Prices paid to U.S. producers fell in August for the first time this year, as lower energy costs eased inflation pressures.

The 0.9 percent drop was more than forecast and followed a 1.2 percent increase in July, Labor Department figures showed today in Washington. So-called core producer prices that exclude fuel and food rose 0.2 percent, matching forecasts.

The figures bolster the forecast of Federal Reserve policy makers that prices will moderate this year as economic growth slows. Oil's retreat to about $100 a barrel from a record in July is helping contain business expenses, making it less likely companies will raise prices for consumer goods.

``We're seeing a partial reversal of the huge price increases we've had the past few months,'' said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado, who accurately predicted the drop in producer prices. ``It is good news for the Fed. There's still upward pressure on core prices, but this report puts a positive light on an unpleasant inflation picture.''

The Commerce Department separately reported that retail sales fell 0.3 percent in August, more than forecast, after a 0.5 percent drop in July.

Treasuries gained after the figures, sending benchmark 10- year note yields to 3.64 percent at 8:48 a.m. in New York, from 3.65 percent late yesterday.

Economists' Forecasts

Prices paid to factories, farmers and other producers were forecast to decline 0.5 percent, according to the median of 77 forecasts in a Bloomberg News survey. Estimates ranged from a gain of 0.2 percent to a drop of 1.2 percent.

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

Producers paid 9.6 percent more for goods than in August 2007, compared with a 9.8 percent gain in the 12 months ended in July.

Excluding food and energy, the gain was 3.6 percent from a year earlier, the biggest year-over-year increase since May 1991, after a 3.5 percent increase in the prior month.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import costs fell in August by the most in almost two decades of record-keeping, Labor figures showed yesterday. Consumer prices, due next week, may be unchanged after rising in July, the Bloomberg survey shows.

Food Prices

In today's producer price report, food prices rose 0.3 percent for a second consecutive month. Energy prices fell 4.6 percent, the biggest decline in almost two years, as petroleum, home heating oil, natural gas and gasoline all became less expensive.

The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, crude oil costs on the New York Mercantile Exchange were down 19 percent in August from the prior month.

Oil, which reached a record $147.27 a barrel on July 11, fell as low as $100.10 this week.

``Inflation risks have diminished somewhat in recent months as commodity prices have come down from their highs,'' Fed Bank of San Francisco President Janet Yellen said after a speech last week. ``But they have by no means disappeared and are very much at the forefront'' of policy makers' attention.

Fed's Rate

The Fed will keep the benchmark interest rate unchanged at 2 percent through the first three months of 2009, according to the median forecast in Bloomberg's monthly survey released this week.

Costs of intermediate goods, those used in earlier stages of production, fell 1 percent from July and were up 16.7 percent from a year ago. Excluding food and energy, intermediate prices rose 1.7 percent.

Prices for raw materials, or so-called crude goods, fell 11.9 percent, following a 4.2 percent jump the prior month.

Passenger car prices fell 0.3 percent after a 1.4 percent gain, and the cost of light trucks dropped 1.9 percent, the most since October 2006.

Prices for capital equipment rose 0.1 percent and consumer goods prices fell 1.2 percent.

Some companies are trying to recoup higher expenses from prior months. Titan International Inc. will charge more for Titan, Goodyear and General off-road farm and construction tires to help offset costlier rubber, steel, carbon black and energy. Prices on most tires will increase 10 percent, starting Oct. 1, the Quincy, Illinois-based company said.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net