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Producer prices decline
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November 10, 1999: 11:50 a.m. ET
Manufacturers' prices dip 0.1% overall, but rise 0.3% ex-food and energy
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NEW YORK (CNNfn) - U.S. producer prices fell in October, though prices excluding food and energy rose, the government reported Wednesday, providing mixed signals about the pace of inflation and whether the Federal Reserve will see fit to raise interest rates again next week.
Producer prices fell 0.1 percent, the Labor Department reported. The figure was below both September's 1.1 percent gain and the 0.1 percent increase economists had forecast. It was the second decline this year and the best showing since a 0.5 percent drop in February.
The core rate, however, which excludes volatile food and energy prices, rose 0.3 percent, higher than the 0.1 percent expected after a 0.8 percent gain in September.
Bonds fell after the report's release as investors focused on the higher-than-expected core rate -- a sign that rising costs on the production line could turn into higher consumer prices. Accelerating inflation erodes bonds' fixed value. Stock investors' reaction was more mixed, with the Dow Jones average almost unchanged at midday.
"I think the market is a little worried that perhaps we're seeing more broad-based inflation gains in producer prices," said David Berson, chief economist at mortgage agency Fannie Mae. "It doesn't mean they will be passed on to consumer prices, but it raises the risk."
Core price concerns?
October's producer price gains follow a month in which the index registered its biggest jump in nine years. September's 1.1-percent rise was boosted by large increases in prices for tobacco and autos. That gain sent stocks and bonds plunging on concern that inflation was finally making its debut.
That didn't repeat itself in October, except in the core rate, which came mostly from rising prices for passenger cars and drug prescriptions. Prices for passenger cars rose 1.1 percent, while prices for prescription drugs gained 1.2 percent.
In fact, excluding cars, the PPI declined 0.3 percent and core prices rose 0.1 percent, in line with analysts' forecasts. And analysts were quick to point out that the factors behind the rising core rate likely won't make their way to store shelves or showroom floors.
"We're seeing a tickling of inflation in the pipeline but it's not going to be passed on to the consumer," said Bruce Alston, a market strategist at Value Line in New York. Inflation advanced at a tame 0.4 percent in September. October's retail inflation numbers will be released next Wednesday, a day after the Fed policy meeting.
Uncertainty about the Fed
Even so, the report raised apprehension among investors over what the Fed's next move will be. The numbers are among the last data that Fed policy makers will have in hand when they meet to discuss the direction of the economy and monetary policy next Tuesday.
Judging by the current yield on the November federal funds futures contract, investors are a little more fearful about which way the Fed will go. The yield on the November contract rose to 5.33 percent from 5.30 percent Tuesday, indicating investors now see a 60 percent chance of an increase next week. On Monday the odds stood at about 40 percent.
Prices for crude goods such as lumber and copper used at the earliest stages of production fell 1.6 percent, partially reversing September's 5.1 percent gain. The declines were driven by a 7.3 percent drop in crude petroleum prices and a 6.4 percent decline in natural gas prices.
Prices for intermediate goods used in the manufacturing process - things such as paint, cardboard boxes, ball bearings and other equipment -- rose 0.3 percent, matching September's gain.
For finished energy goods such as gasoline and heating oil, prices declined 1 percent, while the price of finished consumer foods eased 0.7 percent. The overall Producer Price Index was up 2.7 percent from October 1998.
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Labor Department
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