Producer prices drop, giving Fed more space

WASHINGTON Fri May 11, 2012 9:10am EDT

A Boeing 777 jetliner being manufactured for customer Turkish Airlines is seen in the background, near the fuselage of two other 777s (front), on the production line at Boeing's Commercial Airplane manufacturing facility in Everett, Washington February 14, 2011. REUTERS/Anthony Bolante

A Boeing 777 jetliner being manufactured for customer Turkish Airlines is seen in the background, near the fuselage of two other 777s (front), on the production line at Boeing's Commercial Airplane manufacturing facility in Everett, Washington February 14, 2011.

Credit: Reuters/Anthony Bolante

WASHINGTON (Reuters) - Producer prices unexpectedly fell in April as energy costs dropped by the most in six months, a sign of easing inflation pressures that could give the Federal Reserve more room to help the economy should growth weaken.

The Labor Department said on Friday its seasonally adjusted producer price index dropped 0.2 percent last month. That was the first drop of the year and the biggest decline since October.

"Looking ahead consumer prices should remain contained," said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. "The Fed shouldn't be worried about inflation."

Economists polled by Reuters had expected prices at farms, factories and refineries to be flat last month.

A rise in gasoline prices last year pinched consumers and fueled higher inflation, but the Fed has maintained that the spike would be temporary. A report on consumer prices due next week is expected to give further signs that inflation is ebbing.

Still, the annual inflation rate targeted by the Fed continues to hover around the central bank's 2 percent goal, and Friday's price data did not appear to change investor's views on the outlook for monetary policy.

Futures for U.S. stocks held at lower levels, depressed by a revelation from JPMorgan that it suffered a trading loss of at least $2 billion. U.S. Treasury yields fell as uncertainty over Greece's political future underpinned demand for safe-haven debt.

A number of Fed officials appear loath to take further action to help the economy, with some arguing the central bank needs to get ready to being withdrawing its extraordinary stimulus. The Fed has maintained since January that it expects economic conditions to warrant holding overnight interest rates near zero through at least late 2014.

The report on producer prices for April showed wholesale prices 1.9 percent higher in April than a year earlier, the weakest reading since October 2009.

The drop in PPI was due to a 1.4 percent decline in energy prices, the biggest drop since October. Gasoline costs slumped 1.7 percent while prices also fell for residential natural gas and liquefied petroleum gas.

Wholesale prices excluding volatile food and energy costs rose in line with economist' expectations, up 0.2 percent after March's 0.3 percent gain.

Fueling gains in the core index, wholesale pharmaceuticals prices gained 0.4 percent. Higher prices for civilian aircraft also pushed up core prices.

In the 12 months to April, core producer prices increased 2.7 percent after rising 2.9 percent the previous month. April's reading was the lowest since August and just below analysts' expectations.

(Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)

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