NEW YORK (CNNfn) - U.S. wholesale prices remained unchanged during January, the government reported Thursday, as a sharp decline in tobacco prices helped keep a lid on inflation at the producer level. But some economists warned upward pressure on prices may be starting to build.
The Labor Department said its producer price index, aided by the sudden fall of tobacco prices, remained flat last month, surprising economists who had expected a modest 0.1 percent gain. The results also fell below the index's revised 0.1 percent increase during December.
The core rate, which excludes volatile food and energy prices, declined 0.2 percent. Economists were expecting a gain of 0.1 percent.
The results instantly raised optimism that additional interest rate action by the U.S. Federal Reserve Bank might now be postponed, although economists cautioned the benign report on inflation was partially masked by a 4.2 percent decline in tobacco prices.
"It's a great number obviously, and that's a sigh of relief, but I wouldn't put too much into the decline of the core," said Sherry Cooper, chief economist at Nesbitt Burns Securities. "We know that tobacco prices were actually raised during January, but it occurred during the same day as the survey, so this survey did not pick it up.
"So I don't think the number was quite as weak as the headline."
"The report will not comfort the Fed, despite the good headline data," agreed David Orr, chief economist with First Union Corp. "The news further back in the pipeline was not good."
Investors had anxiously awaited the PPI data all week, particularly after a sharp spike in oil prices and housing starts stoked fears that additional interest rate hikes may be on the way. Investors got further insight into that subject later Thursday morning when Fed Chairman Alan Greenspan began his semi-annual Humphrey-Hawkins testimony to Congress.
Despite the warnings from economists, Wall Street initially turned bullish on the PPI report. The Dow Jones industrial average climbed more than 1 percent shortly after the opening bell, but later fell back into negative territory as word of Greenspan's speech began to filter out. The 30-year bond rose 9/32 of a point in price for a yield of 6.24 percent.
The sharp decline in the price of tobacco products was spurred by a 4.9 percent decrease in cigarette prices during the month.
That helped counter a 3.0 percent rise in gasoline and a 6.2 percent increase in the price of heating oil that helped push the producer price of energy goods up 0.7 percent during January, after posting a 0.4 percent increase during December.
Other price increases were largely tame. The price of passenger cars rose a modest 0.1 percent after a 0.4 percent increase during December. The cost of light motor trucks, meanwhile, fell 0.8 percent.
Finished consumer foods prices inched forward 0.1 percent after remaining unchanged during December.
Inflationary pressures bubbling?
But farther back up the production pipeline, inflationary pressures continued to bubble, as they have for several months. The price of intermediate energy goods, or the prices charged to wholesalers, rose 0.8 percent during the month, helping push the overall cost of immediate goods up 0.4 percent.
The price increase on crude goods was even more dramatic, rising 2.7 percent overall and 3.2 percent when food and energy prices were stripped out.
But Cooper noted productivity and technology gains have largely kept these pricing pressures from work their way to the consumer. (274KB WAV) (274KB AIFF)
"At the intermediate and crude goods levels, we continue to see pipeline pressures toward higher inflation," said Paul Kasriel, chief domestic economist with Northern Trust. "Next month, I suspect we're not going to see the tobacco offset, but maybe it will be something else."
Economists expressed mixed opinions on what impact the PPI report might have on the Fed's deliberations on possible future interest rate hikes. Several expected to have a better indication after the Labor Department releases is consumer price index Friday.
"Based on these numbers, the markets should rise, but you have Greenspan and the CPI hanging over us," said Robert MacIntosh, vice president and chief economist with Eaton Vance Management Inc. "The PPI measures only about 20 percent of the U.S. economy, and the CPI is a far more comprehensive number."
In a separate report, the department said the number of newly unemployed Americans filing for state benefits fell 20,000 last week to 283,000, indicating labor markets remain particularly tight.
-- from staff and wire reports