Tuesday, May 20, 2008

Producer Prices in U.S. Increase More Than Forecast

U.S. Producer Prices, Minus Food, Energy, Rise 0.4%

By Courtney Schlisserman

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Prices paid to U.S. producers, excluding food and fuel, rose more than forecast in April, reflecting increases in automobile and furniture costs.

The 0.4 percent gain in so-called core prices was twice as big as anticipated and followed a 0.2 percent increase in March, the Labor Department said today in Washington. A drop in energy costs and unchanged food expenses held the total price measure to a 0.2 percent gain.

Soaring raw-material costs are likely to hurt profits as a slowing economy prevents companies from raising prices enough to cover expenses. A report last week showed prices paid by consumers rose less than forecast in April.

Businesses ‘‘have considerable pipeline cost pressures,'' said Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. While companies may find it tough to pass the costs on to consumers given the economic slowdown, today's figures are ‘‘a reminder that inflation pressures reside even as we have slower growth,'' he said.

Treasury securities rallied, with benchmark 10-year notes yielding 3.80 percent at 9:39 a.m. in New York, down from 3.83 percent late yesterday.

Economists' Forecasts

Economists forecast producer prices would rise 0.4 percent, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from no change to a 1 percent gain. Excluding food and energy costs, producer prices were expected to rise 0.2 percent, according to the Bloomberg survey.

Factories, farmers and other producers were paid 6.5 percent more in April than a year earlier. That compares with a 6.9 percent gain for the 12 months ended in March.

The core index was up 3 percent in April from a year earlier, the biggest gain since December 1991.

Rising costs for metals, chemicals and fuel propelled the increases in raw materials, the report showed. The price of steel-mill products jumped 5.5 percent in April and agricultural chemicals surged 5.6 percent. Further down the pipeline, prices for scrap steel and iron soared 32 percent, the most since July 2004, and scrap copper costs jumped 5.3 percent.

So far this year, wholesale costs are up 8.5 percent at an annual pace compared with 8.4 percent for the same time last year. The core rate has increased at a 5.2 percent annual pace, compared with 2.1 percent in the first four months of 2007.

Food, Fuel

Food prices were unchanged and fuel costs dropped 0.2 percent, the first decline this year.

The increases in fuel costs last month were less than the gains recorded for April of prior years and may have lead to the government reporting that energy costs were lower on a seasonally adjusted basis.

Crude oil and other energy products prices have continued to rise this month and may elevate inflation figures in coming months. The price of a barrel of crude on the New York Mercantile Exchange closed at a record $127.05 a barrel yesterday.

The cost of passenger cars climbed 0.4 percent, light trucks were up 1.3 percent and commercial furniture jumped 1.8 percent, the most since February 1981.

Costs of intermediate goods, those used in earlier stages of production, increased 0.9 percent, after a 2.3 percent gain the prior month. They rose 11 percent from a year ago.

Excluding food and energy, intermediate prices increased 1.2 percent. Prices for raw materials, or so-called crude goods, increased 3.2 percent.

Impact on Deere

Deere & Co., the world's largest maker of tractors and combines, is among companies being constrained by rising costs. The Moline, Illinois-based company said last week that profit this quarter will fall short of analysts' estimates as U.S. construction slows and material prices jump.

Materials, which represent as much as 20 percent of Deere's costs, and freight expenses will rise as much as $500 million this year, twice as much as the company's earlier forecast. It spent $60 million more than in the year-earlier quarter.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. The government said last week that prices of imported goods jumped 1.8 percent in April, pushed up by higher energy and metals costs.

The consumer price index, the government's broadest measure of inflation, increased a less-than-forecast 0.2 percent last month, as cheaper costs for cars and hotel rooms offset the biggest jump in food in 18 years.

Rate Expectations

Concern over inflation has led investors to project Fed policy makers will keep the benchmark interest rate unchanged at 2 percent at least through September. It would be the first pause since the central bank started cutting rates in September.

While uncertainty is ‘‘high,'' inflation is likely to moderate as the economic slowdown continues, policy makers said last month in announcing a reduction in the benchmark rate. Even so, some officials are expressing greater concern.

Other companies have said they are likely to pass on price increases to customers. Dr. Pepper Snapple Group Inc., a beverage maker, may raise prices this year to counter higher transportation and ingredient costs, Chief Executive Officer Larry Young said May 7.

‘‘We took pricing last year, we'll be looking at probably taking some pricing again this year,'' Young said in a Bloomberg television interview. The company is working on 23 cost-cutting projects, he said.

-- With reporting from Rhonda Schaffler and Monica Bertran in New York. Editors: Carlos Torres, Chris Anstey

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