U.S. Producer Prices Rose Less Than Forecast in May

By Courtney Schlisserman and Robert Willis

June 16 (Bloomberg) -- Prices paid to U.S. producers rose less than forecast in May as food expenses dropped, leading to the biggest 12-month slump in wholesale costs in a half century.

The 0.2 percent increase in prices paid to factories, farmers and other producers followed a 0.3 percent gain in April, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices unexpectedly fell.

The lack of sustained gains in sales is one reason companies will need to keep a lid on prices, preventing inflation from flaring. The rising cost of commodities such as gasoline may further limit consumers’ discretionary spending at a time when the economy is showing signs of stabilizing.

“This clearly suggests there’s no inflation yet,” said Anika Khan, an economist at Wachovia Corp. in Charlotte, North Carolina. Price gains are “a gasoline story,” she said. For other goods, “companies can’t pass on the prices because the consumer is not in a situation to pay right now.”

Economists forecast producer prices would rise 0.6 percent, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from no change to a 2.3 percent gain.

Compared with a year earlier, companies paid 5 percent less for goods, the biggest decrease since 1949 and reflecting the drop in fuel costs late last year that has since partially reversed.

Core Prices

Excluding food and fuel, prices fell 0.1 percent, the first decrease since October 2006. Core costs were projected to rise 0.1 percent, the same as a month earlier, according to the Bloomberg survey.

A separate Commerce Department report today showed U.S. builders broke ground on more houses than forecast, as multifamily units surged and single-family units rose by the most since January 2006. The 17 percent increase in overall starts to an annual rate of 532,000 followed a 454,000 pace the prior month, the department said.

A 2.9 percent increase in the cost of fuel led to the increase in wholesale prices. Gasoline jumped 14 percent and diesel fuel climbed 4.5 percent. These cost may rise further in June. The price of crude oil futures traded on the New York Mercantile Exchange closed at an eight-month high of $72.68 a barrel on June 11.

The drop in prices excluding food and fuel was led by decreases in pharmaceuticals, cosmetics and civilian aircraft.

The cost of food dropped 1.6 percent as prices for eggs, fruits and vegetables all fell.

Autos

Passenger-car costs increased 0.1 percent after gaining 0.2 percent a month earlier. Car prices are likely to be restrained as automakers boost discounts to sell unwanted inventory. Bargain-hunters flocked to Chrysler LLC and General Motors Corp. dealers in May, helping to boost auto sales, according to Commerce Department data released last week.

Chrysler, seeking to shrink inventory while in bankruptcy, began offering five-year, no-interest loans on some models this month. The financing, announced June 3, runs through July 1 and is an alternative to rebates of as much as $6,000 for consumers who buy through certain credit unions and already own a Chrysler vehicle. The cash option was put in place last month.

Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. rose 1.3 percent is May as petroleum costs increased, the government said last week. Labor figures tomorrow may show consumer prices increased 0.3 percent after being unchanged in April, economists forecast.

Fed’s View

Richard Fisher, president of the Federal Reserve Bank of Dallas, yesterday dismissed concern that the central bank’s record purchases of assets will cause inflation to soar. Fisher, who describes himself as among the most aggressive inflation fighters on the Federal Open Market Committee, said it’s inappropriate to be overly concerned on price pressures now because of the amount of “slack” in the economy.

Fed policy makers meet to discuss the direction of interest rates next week.

The U.S. will contract at a 2 percent pace this quarter and then grow at a 0.5 percent rate from July through September and 1.9 percent the final three months of the year, according to a Bloomberg survey taken earlier this month. For all of 2009, the economy will contract 2.7 percent, the biggest drop in the post- World War II era.

A rising unemployment rate, which economists surveyed by Bloomberg forecast will average 9.2 percent this year, is another reason spending may be limited and inflation subdued.

Consumer spending, which accounts for 70 percent of the economy, will fall at a 0.6 percent annual pace in the current quarter and rise at an average 1.1 percent pace in the last six months of the year, down from last month’s projections. For all of 2009, purchases will drop 0.7 percent, the worst performance since 1974.

To contact the reporters on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net; Bob Willis in Washington bwillis@bloomberg.net