July producer prices jump on energy costs

08/17/2005

Wednesday August 17, 4:53 PM EDT

WASHINGTON (Reuters) - Soaring energy costs pushed U.S. producer prices up by twice as much as expected in July, government data showed on Wednesday, with core prices excluding food and energy also flashing a warning of future inflation.

The Labor Department said the producer price index rose 1.0 percent last month. Prices for finished energy goods jumped 4.4 percent, the biggest rise since October 2004, while finished consumer food prices fell 0.3 percent.

Excluding those volatile areas, so-called core producer prices climbed 0.4 percent.

“There are pipeline inflation pressures out there. Business pricing power continues to rise as the economy grows above trend and there are upside risks going forward that eventually will show up,” said Morgan Stanley economist Ted Wiesman.

Wall Street economists had expected overall producer prices to rise 0.5 percent, with core prices up 0.1 percent.

One reason for the high reading on core PPI was the impact of prices of cars and SUVs, up 1.5 and 1.4 percent respectively in July. A Labor Department official said that with these stripped away, core PPI rose 0.2 percent in July.

“The PPI car and truck survey has been extremely volatile. You should really be looking at PPI excluding energy, food and vehicles,” said Wiesman.

BONDS JOLTED

But the broader sense that strong U.S. growth could fuel inflation in the future startled fixed income markets.

“This should keep investors and policy-makers on alert with a recovering economy and a growth profiling stronger in the third quarter than the second quarter,” said Anthony Chan, senior economist at JP Morgan Asset Management.

Bond prices slumped while the dollar strengthened as investors bet that the Federal Reserve would keep up a campaign of steady interest rate rises.

This has delivered 10 consecutive quarter percentage point rate hikes, lifting the overnight fed funds rate to 3.50 percent with investors expecting it to reach 4.25 percent before year-end.

U.S. government 10-year notes retreated 15/32 in price to yield 4.27 percent while the dollar hit a two-week peak against the euro of $1.2262 in late New York trade. Stocks closed slightly higher, with the Dow Jones Industrial Average posting a 36.86 point gain at its unoffical close of 10,550.31.

The PPI index, a gauge of prices received by farms, factories and refineries, followed a steady reading in June. But over the past 12 months, producer prices have climbed 4.6 percent overall and 2.8 percent stripping out food and energy.

This was the fastest rise in core prices since a matching 2.8 percent increase over the 12 months ending November 1995.

“We are seeing some pricing pressure on the wholesale level, but the (consumer price index) report yesterday showed that it hasn’t really passed on to the consumer level,” said Chan.

The Labor Department said on Tuesday that June consumer prices rose 0.5 percent, but were up a much milder 0.1 percent excluding food and energy costs. Oil prices have spiked to record levels, averaging $12 more a barrel for the full year than in 2004.

But tight conditions in sectors where growth has been particularly strong are leading prices higher, said Gary Thayer, chief economist at AG Edwards and Sons.

For instance, floor covering prices were up 6.9 percent in July compared with the same month last year while household furniture advanced 3.6 percent, Labor Department data showed.

Thayer said this showed that core wholesale prices were feeling the heat of strong growth, although he did not think there was any reason to get alarmed overall about inflation.

“We do have some signs of the strong economy feeding into prices. But overall, inflation is still contained,” he said.