US wholesale prices fall as output falters

City A.M. Reporter

US producer prices recorded their largest fall in more than four years in October and industrial output was flat, underscoring concerns at the Federal Reserve about low inflation amid moderate economic growth.

Economists said the data supported the US central bank’s 3 November decision to ease monetary policy further even if the 0.6 per cent drop in the core Producer Price Index largely reflected the annual launch of new motor vehicle models.

Stripping out the sharp declines in vehicle prices, core producer prices – which exclude volatile food and energy costs – would have risen by 0.2 per cent, the Labor Department said yesterday, a modest gain consistent with the economy’s sluggish growth trend and tepid domestic demand.

The overall decline in the core index was the biggest since July 2006 and followed a 0.1 per cent gain in September. A similar increase had been expected in October.

Concerns that low inflation could spiral into a damaging phase of deflation prompted the US central bank this month to ease monetary policy further, a step that will see it buy $600bn worth of government bonds through the middle of 2011.

That measure has been criticised by some economists, amid signs that the recovery is regaining some strength after losing momentum in the summer.

Despite brighter signs, soft demand is forcing retailers to continue with price discounting to lure customers.

A separate report from the Fed showed industrial production was flat last month, short of economists’ expectations for a rise of 0.3 per cent, largely because of weak utility output that reflected unusually warm weather. But manufacturing production rose 0.5 per cent, its biggest gain since July.

Economists do not expect the distortions from the annual introduction of new vehicle models to spill over into data on consumer inflation, which is due today. Core consumer prices are expected to have edged up 0.1 per cent after being flat in September.

The core PPI was depressed by a 4.3 per cent drop in the price of light motor trucks and a three per cent drop in prices for passenger cars.