While the September all-items producer price inflation came in as expected, the core measure excluding volatile food and energy components delivered an upside surprise. With economies weakening across the globe, however, analysts say it's only a matter of time before prices begin falling, which should give the Fed a green light to cut interest rates further if needed.
The U.S. Department of Labor's seasonally adjusted core measure of producer price inflation grew above expectations with a 0.4% month-over-month increase in September, pushing the annual advance to a 17-year high at 4.0%. The all-items measure of producer price inflation fell 0.4% in the month, marking the second month of deflation. Annually, the headline rate is up a brisk 8.7%.
Paul Ferley, assistant chief economist at RBC Capital Markets, said the decline in the all-items index reflects the downward pressure on energy prices, though the gasoline component fell only 0.5% in September after a 3.5% drop in August. "However, heating oil prices continued to show a large 13.9% decline after a 13.6% drop in August," he added.
Looking at the price advances, Ferley said it was "unexpected" for core prices to advance by double what the consensus was expecting. "The pressure was led by gains in pharmaceuticals (+0.9%), capital equipment (+0.5%) and passenger cars (+0.5%). The gain in the latter was particularly surprising given the marked weakening in auto sales in the month," he added.
BMO's Sal Guatieri was even more optimistic about prices, concluding that pressures are receding and they "won't be an obstacle to further Fed easing." He said core consumer inflation could remain "stubbornly" high for some time, but that will only reflect the "lingering impact of past increases in commodity and import prices," and doesn't change the overall trend of deflationary forces.
Economists from RDQ noted that prices for core finished goods "have been growing at a 5.4% annualized rate over the last three months," but the Fed won't be concerned by a gain that isn't likely to last. "We still see the Fed cutting the fed funds target rate by 25 basis points on October 29th," they added.
Looking ahead to Thursday, economists from TD said the PPI report suggests a pass-through risk into the core measure of the consumer price index.
By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008