U.S. Producer Prices Slump on Energy Price Decline

Daily Forex Fundamentals | Written by RBC Financial Group | Sep 12 08 14:14 GMT |

Producer prices declined 0.9% in August, a much larger dip than the 0.5% drop predicted by forecasters and in sharp contrast to the 1.2% surge recorded in July. Energy prices alleviated some of the pressure on producer prices as the index fell 4.6% in the month. The core measure, which excludes both energy and food prices, increased at a 0.2% rate, much slower than the unexpectedly robust 0.7% increase recorded in July but bang on market expectations. On a year-over-year basis, the pace of increase in producer price inflation eased to 9.6% from 9.8% in July with the core measure edging up to 3.6% from 3.5%. The decline in the energy price index reflected falling prices for natural gas, gasoline and heating oil, the latter was down 13.6% in the month. Despite the monthly dips, however, prices for overall energy products stood 27.4% higher than in August 2007. Passenger car prices also declined in August and were off 0.3%. On the upside, tobacco products, capital equipment and pharmaceutical preparation prices all posted gains. Intermediate goods prices dropped 1% in August, although they were 16.7% higher than a year ago while crude goods prices fell 11.9% in August to be up 38.1% relative to August 2007. Despite the monthly dip in producer prices in August, the elevated level of annual price increase for both the all-items and core measures will keep the Fed wary that the past strong gains in energy prices will start to lift inflationary expectations. The annual increase in the core measure stood at it highest level in 17 years and the Fed will be watching to see if these upward price pressures will be sustained and passed through to the consumer level. The core consumer inflation rate rose to 2.5% in July, although it remains entrenched within its range of 2.1% to 2.9%. The PPI report is likely to be overshadowed by this morning's release of August retail sales which showed an unexpected decline in overall sales in the month and a bigger-than-expected drop in ex-auto retail activity. We expect the Fed will hold the policy rate steady at 2% at next week's meeting as concerns about the prospect of weaker growth faces off against worries that the elevated annual inflation rates will eventually fuel a pop in inflation expectations. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.