Producer Prices Skyrocket in January

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Producer Prices Skyrocket in January

Friday, February 16, 2001

By Barbara Hagenbaugh

WASHINGTON (Reuters) - U.S. producer prices shot up at their fastest pace in more than a decade in January, the government said on Friday in a report suggesting the threat of inflation may force the Federal Reserve to take a more cautious approach in cutting interest rates.

The Producer Price Index -- a key gauge of prices received at the farm and factory gate -- jumped 1.1 percent in January after a 0.2 percent increase in December, the Labor Department said. That was the largest increase in the PPI since September 1990, when wholesale prices rose 1.3 percent.

Excluding the volatile food and energy sectors, the closely watched core rate soared 0.7 percent last month, the biggest increase since a 1.0 percent gain in December 1998. Core prices rose a mere 0.1 percent in December 2000.

Bonds lost ground on the data. Traders said while it was likely an aberration, it could complicate the inflation-wary Fed's rate reduction campaign to revive the flagging economy.

The central bank cut rates a full percentage point last month in two separate moves designed to avert a sharp slowdown and Fed watchers believe more rate reductions are upcoming.

The numbers were well above expectations from analysts polled by Reuters, who before the report was released had estimated that producer prices rose only 0.3 percent and core prices inched up only 0.1 percent last month.

STATISTICAL BLOOPS?

The report startled economists but some were not convinced that the unexpectedly strong number was the harbinger of an underlying economic problem.

"I still think inflation is not the story," said Neal Soss, chief economist at Credit Suisse First Boston in New York.

"I find it hard to believe that the environment changed so quickly and so dramatically in such an adverse fashion. There must be some combination of statistical bloops that all came together at once."

He cited a jump in tobacco prices, which rose 5.6 percent in January, saying: "I don't see that as the economy."

The Labor Department said that if sharp increases in cigarette and car prices were excluded, the so-called core rate -- prices outside of food and energy -- would have risen just 0.3 percent, a much less alarming figure than the 0.7 percent rise in core prices overall.

Car prices at the wholesale level posted a 1.2 percent gain last month, after rising just 0.2 percent in December, while cigarette prices jumped 6.3 percent, the biggest climb since a matching increase in February 2000.

ENERGY PRICES SOAR

Led by skyrocketing prices for residential natural gas and electric power, energy prices soared 3.8 percent in January, the biggest gain since a 6.1 percent rise in June. The increase followed a 0.8 percent gain in December.

Natural gas prices rose a record 11.3 percent last month while the cost of residential electric power at the wholesale level increased 1.4 percent, the biggest gain since November 1994.

Food costs rose 0.8 percent last month, the sharpest gain since a 1.1 percent rise in April. Food prices fell 0.4 percent in December.

"A little bit of a shocker," said Jay Bryson, global economist at First Union National Bank in Charlotte, N.C. "It appears it is largely in food and energy," he added, saying the core intermediate goods number, a look at costs at an earlier stage of production that strips out food and energy, showed only a muted gain of 0.2 percent in January.

The data were released more than a month before the Federal Reserve's next interest rate-setting meeting.

The Fed has been widely expected to cut interest rates for the third time this year after the conclusion of its meeting on March 20, but a combination of stronger economic data and the specter of inflation will likely force analysts to reexamine views on how much rate-cutting may lie ahead.

More information on the inflation front will emerge on Wednesday when Labor issues its Consumer Price Index, a measure of inflation at the retail level.

Copyright ©2001 Reuters Limited.

http://news.lycos.com/headlines/TopNews/article.asp?docid=RTNEWS-ECONOMY-PRICES-DC&date=20010216

-- Martin Thompson (mthom1927@aol.com), February 16, 2001


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