U.S. October Producer Prices Rise 0.7%; Core Prices Fall 0.3%
U.S. October Producer Prices Rise 0.7%; Core Prices Fall 0.3%
Nov. 15 (Bloomberg) -- U.S. producer prices rose last month as costs increased for natural gas and heating oil. Excluding energy and food, wholesale prices declined by the most in more than two years, reflecting cheaper cars and clothes.
Prices paid to factories, farmers and other producers rose 0.7 percent following a 1.9 percent increase that was the biggest in 15 years. Excluding energy and food, so-called prices dropped 0.3 percent after a 0.3 percent rise in September.
Companies have had limited success passing through higher costs for energy and other commodities in the last year. The decline in the core, partly a result of how the government values new model year automobiles, won't be enough to keep Federal Reserve policy makers from raising interest rates to ensure inflation doesn't accelerate, economists said.
``There appears to be a significant variation in the amount of pricing power,'' Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in Boston, said before the report. ``Inflation still seems relatively contained but there continues to be a significant amount of anecdotal evidence that companies either are passing on cost increases or at least plan to in 2006.''
Car prices declined 3 percent last month, the most in four years. October is the month when the government begins tracking costs of new model year automobiles and adjusts the prices to reflect changes in quality improvements.
No change was forecast for the October producer price index, according to the median of 64 forecasts in a Bloomberg News survey. Estimates ranged from a decrease of 0.5 percent to an increase of 0.6 percent. Excluding food and energy, prices were expected to rise 0.2 percent, according to the survey median. The October decline was the biggest since a 0.5 percent drop in April 2003.
Last Year
Producer prices were up 5.9 percent for the 12 months ended in October, compared with a 6.9 percent year-over-year gain the previous month. Core prices were 1.9 percent higher, after a 2.6 percent year-over-year increase in September.
So far this year, producer prices are rising at a 6.6 percent annual rate, compared with a 4.8 percent pace in the same 10 months last year, according to a Labor Department official. Core prices are rising at a 1.8 percent annual pace, slower than the 2.1 percent rate through the same period in 2004.
The cost of energy rose 4.1 percent last month, down from a 7.1 percent increase in September. The price of natural gas rose 12.7 percent, while the cost of heating oil increased 12.3 percent.
Other Reports
Other reports have shown companies are gaining some pricing power and that core inflation may be rising. The Institute for Supply Management's index of prices paid by manufacturers rose to 84 in October, from 78 the month before. The Philadelphia Fed's index of prices received by area factories jumped to 32.6 in October from 8.6 a month earlier, the biggest increase since 1981.
Economists forecast the Labor Department to report tomorrow that consumer prices excluding food and energy rose 0.2 percent in October after a 0.1 percent rise, according to a Bloomberg News survey. Year-over-year core prices probably were 2 percent higher.
``We're starting at a point where inflation is at the top of the range the Federal Reserve thinks is acceptable and they don't want it to break through,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.
Federal Reserve Bank of St. Louis President William Poole said on Nov. 9 that the risk of inflation is still ``skewed toward the high side'' even after 12 consecutive interest rate increases. The central bank's preferred inflation barometer, the personal consumption expenditures price index minus food and energy, may exceed economists' forecasts for a 2.25 percent increase next year, he told reporters after a speech in Missouri.
Competition
At the same time, there are few signs that inflation is ``running rampant,'' Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said in an interview.
``Competition from abroad is acting as a disinflationary force,'' Fisher, a voter on the rate-setting Federal Open Market Committee, said in an interview yesterday from his Dallas office. He declined to comment on interest rates.
The Fed's Open Market Committee on Nov. 1 raised their target for overnight loans among banks by 0.25 percentage point to 4 percent and indicated further increases were likely.
The cost of intermediate goods by producers, products that are partially finished such as lumber and steel, rose 3 percent, today's report showed.
Excluding food and energy, intermediate prices rose 1.2 percent for a second month.
Crude Goods
Prices of materials used at the earliest stage of the production process, including scrap steel and timber, rose 6.7 percent after rising 10.2 percent in September. Excluding food and energy, core raw material prices fell 1.2 percent.
Higher prices charged to customers was one of the reasons Dynegy Inc., the owner of power plants in 12 U.S. states, raised its forecast for 2005 net income after payment preferred dividends on Nov. 8
``We were able to raise our forecast because of higher prices and higher sales volumes,'' Chief Executive Bruce Williamson said in an interview.
U.S. sales at automakers fell in October because incentive spending was cut by 15 percent, according to Autodata Corp. Auto company discounts probably will continue in some form this year and into 2006, Michael Jackson, chief executive of AutoNation Inc., said in an interview on Nov. 8.
Autos
``We may see another year of negative pricing in autos,'' Jackson said. While total sales in the U.S. have been high, Ford and GM ``have struggled with share in the market place and with their tremendous legacy costs have struggled on their profitability side,'' he said
The cost of computers fell 1.5 percent after a 2.5 percent decline the month before.
Food prices fell 0.1 percent following a 1.4 percent increase in September, the government said.
Prices for capital equipment dropped 0.2 percent after rising 0.3 percent in September.
Higher energy prices have not yet affected sales at Cisco Systems Inc.'s commercial business, Chief Executive John Chambers said in an interview on Nov. 9. Sales to commercial customers, Cisco's fastest-growing audience, helped push up fiscal first- quarter revenue to $6.55 billion.
``The economy appears to be stronger than most people anticipate and our U.S. business was the best we've seen in well over a year in terms of year over year,'' comparisons, Chambers said.
To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.
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