U.S. Producer Prices Fall 1.9% as Fuel Costs Plunge

By Shobhana Chandra

Jan. 15 (Bloomberg) -- Prices paid to U.S. producers fell 1.9 percent in December, capping the first annual decrease in seven years, as demand for raw materials collapsed with the deepening recession.

The drop was in line with forecasts and followed a 2.2 percent decrease in November, Labor Department figures showed today in Washington. Excluding fuel and food, the so-called core rate rose 0.2 percent after a 0.1 percent increase.

The global slowdown has caused sales at companies such as Alcoa Inc. to slump, leading to cutbacks in output and hiring that are reverberating through the economy. Falling commodity costs and asset values are raising concern among some Federal Reserve officials about the danger of deep and extended price decreases that would worsen the economic downturn.

“The recession will continue through most of the year, and in this environment, producer prices can only move downward,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto, who forecast a 2 percent drop in PPI.

Treasuries were little changed after the report, while stock-index futures remained lower. Yields on benchmark 10-year notes were at 2.21 percent at 8:35 a.m. in New York. Futures on the Standard & Poor’s 500 Stock Index lost 0.8 percent to 833.40.

Economists’ Forecasts

Prices paid to factories, farmers and other producers were forecast to decline 2 percent, according to the median estimate of 77 economists in a Bloomberg News survey. Estimates ranged from declines of 0.8 percent to 2.9 percent.

Core prices were projected to rise 0.1 percent for a second month, the survey median showed.

Wholesale prices fell 0.9 in 2008, the first drop since 2001. Excluding food and energy, wholesale costs rose 4.3 percent last year, the biggest gain since 1988.

Another Labor report showed first-time claims for unemployment benefits rose 54,000 last week, more than forecast, to 524,000, signaling companies stepped up the pace of firings at the start of the year.

President-elect Barack Obama is pressing for quick passage of a stimulus plan of about $775 billion that would cut taxes, boost infrastructure spending, and create jobs.

Fed officials projected that “the economic outlook would remain weak for a time,” and discussed setting an explicit target for inflation to discourage expectations that price increases will slow “below desired levels,” according to minutes of their December meeting issued last week.

‘Uncomfortably Low’

Some policy makers saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will likely “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

In today’s report, the drop in wholesale prices last month was led by a 9.3 percent decline in fuel costs. Gasoline dropped a record 26 percent and heating oil expenses dropped 24 percent, the most since 2003.

Food prices decreased 1.5 percent, the biggest drop in almost three years.

Tumbling prices in earlier stages of production indicate costs for finished goods will keep dropping. Intermediate goods, such as chemicals, fertilizer and lumber, dropped 4.2 percent. Prices for raw materials, or so-called crude goods, fell 5.3 percent following a 12.5 percent drop.

Cars, Medicines

The gain in finished goods prices excluding food and fuel was paced by a 1.2 percent increase in passenger car costs and a 1.1 percent gain in medicines.

Crude oil futures have fallen about three-fourths from the July peak of $147.29 a barrel on the New York Mercantile Exchange. Aluminum prices are at five-year lows as automakers, builders and appliance manufacturers cut orders.

Alcoa, the largest U.S. aluminum producer, this month reported its first quarterly net loss in six years and said it will further cut output in 2009 if demand continues to weaken.

“The aluminum industry is caught up in a perfect storm of historic proportion,” Chief Executive Officer Klaus Kleinfeld said on a conference call with analysts on Jan. 13. “Inventories are building and prices are decreasing.”

Producer prices are one of three inflation gauges reported by the Labor Department. Prices of goods imported into the U.S. fell for a fifth consecutive month in December, figures showed yesterday.

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