US producer prices declined more than expected in February, according to the latest figures provided in a government report released Wednesday.
The Labor Department’s Producer Price Index (PPI) dropped 0.6 in February — the biggest fall since July, and after soaring 1.4% in January. The PPI measures inflationary pressures before they reach the consumer or, more technically, the wholesale price of goods leaving the factory gate. Many analysts were forecasting a monthly decrease ranging from 0.2% to 0.3%.
"Disinflation is going to be with us for a while," Julia Coronado, a senior U.S. economist at BNP Paribas in New York, said in a Bloomberg Radio interview. "That’s going to allow the Fed to stay on hold for a lot longer than the market is expecting."
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 point. 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.
In a policy statement on Tuesday, the Federal Reserve said that it expected price inflation to remain subdued for some time.
Leading last month’s retreat was a 2.9% reduction in energy costs — the first decline in four months. About 90% of the February drop can be attributed to gasoline prices, which fell 7.4% at the wholesale level. Gasoline prices jumped 11.5% in January. Lower prices for home heating oil and liquefied petroleum gas also were factors in the finished energy goods decrease, according to the Labor Department. The cost of food rose by 0.4%.
Stripping out volatile energy and food costs, core producer prices rose by 0.1% in February after a 0.3% reading in January.
"It remains our belief that soft final demand and copious global spare capacity will keep the core PPI on a benign path," Josh Shapiro, chief U.S. economist at MFR Inc., wrote and was cited on MarketWatch.
Compared with a year earlier, producer prices gained 4.4%, marking the fourth straight increase. 12-month wholesale inflation in January came in at 4.6%. Annual core producer prices rose 1% last month, which was the same level reported in January.
The government’s more closely watched Consumer Price Index (CPI) for February is scheduled to be released on Thursday at 8:30 AM ET. The CPI measures inflation pressures at the consumer level.
