Cheap energy pushes producer prices down 1.2%

U.S. Producer prices fell 1.2% in March as lower energy prices drove down costs more than expected, according to a Labor Department report released Tuesday.

The Producer Price Index (PPI) measures prices at the factory door and inflation pressures before they reach the consumer. In a reversal after two months of gains, the latest PPI figures again raise notes of deflationary concern for some economists. However, they are outweighed by the Fed’s mission to spur economic activity.

"Clearly, deflation is a concern right now, though the biggest worry is to restore growth," Anika Khan, an economist at Wachovia Corp. in Charlotte, North Carolina, was quoted on Bloomberg. With inflation contained, "it gives the Fed more room to try to restore growth."

Deflation is a persistent decrease in general prices, or the opposite of inflation. Falling prices may seem like good news for consumers, but only to a certain extent. If prices mark sustained deflationary levels that strike below the cost to produce goods and services, further economic turmoil can ensue with production cuts, payroll reductions and deepening unemployment.

The PPI rose 0.8% in January, which was the first increase since August 2008. Producer prices climbed 0.1% in February. March costs were driven lower by a 5.5% reduction in energy prices, to include a 13% drop in gasoline and home heating oil. Helping as well was a 0.7% decline in food prices.

The core PPI, which excludes volatile food and energy costs, remained unchanged.

Prices on traditional inflation hedges like oil and gold fell early Tuesday following the Labor Department’s report.

The government’s Consumer Price Index (CPI) for March is calendared for release Wednesday at 8:30 AM ET. The CPI measures inflation pressures at the consumer level. Economists are forecasting consumer prices to gain around 0.1% with the core CPI up 0.1%.

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