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Most wholesale prices in check
Overall PPI measure rises more than expected, but prices fall outside of food, energy.
November 15, 2005: 12:02 PM EST
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NEW YORK (CNN/Money) - Prices paid on the wholesale level shot up much more than expected in October, although prices outside of food and energy fell in the government report released Tuesday.

The Labor Department's Producer Price Index rose 0.7 percent last month. That's less than the 1.9 percent jump seen in September, but far more than the forecast for unchanged prices according to economists surveyed by Briefing.com.

But the so-called "core PPI," which excludes food and energy prices, posted a 0.3 percent decline, compared to a 0.3 percent rise in September. And economists had only been looking for the core PPI to moderate to a 0.2 percent rise, rather than actually decline.

The core prices are more closely followed by the Federal Reserve and economists, and the drop in the core helped take Treasury prices briefly higher following the report.

"I think the core trumps the energy prices," said David Wyss, chief economist for Standard & Poor's. "Outside of energy and energy-affected areas such as plastics, the only place we're seeing inflation is in building materials, which is the other side of Katrina. If you look at core inflation, year over year, it's up 2.0 percent. That's probably exactly where the Fed wants it. It doesn't mean it's dead, but it can stay on the back burner as an issue."

Energy prices still rose 4.1 percent in the month from the September level, even though many energy prices backed off of the post-Hurricane Katrina spikes seen in that month. While seasonally adjusted gasoline prices were down 3.3 percent from September, according to the report, natural gas and diesel fuel were both up more than 20 percent from September level.

The higher-than-expected energy prices likely contributed to many economists missing their forecasts for the overall October reading. Part of the issue may have been the timing of when the price readings were taken by the Labor Department, according to some economists.

Matt Martin, senior economist with Economy.com, said that not all energy prices are as likely to retreat the way that gasoline prices have since Katrina. Natural gas as well as heating oil and diesel fuel are still high, and electric prices aren't showing any signs of retreat. He also said the big drop in core PPI is partly due to a fall in new vehicle prices in the month.

Still Martin agrees with Wyss and other economists that the PPI is good news on inflation.

"I think on the whole it's a good story," said Martin. "It means the Fed stays the course they're on and there's no jolt to monetary policy."

The report comes the day before the government's Consumer Price Index reading, which the the measure of prices on the retail level and the government's key inflation measure.

Economists are looking for the CPI to be unchanged after a 1.2 percent rise in September, while the core CPI is forecast to be up 0.2 percent, after a 0.1 percent rise the previous month.

For a look at what the economy and economic readings mean to you and the markets, click here.  Top of page

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