Producer Price Index Drops 0.1 Percent in February

Andrew Klips |

After taking a drubbing on Thursday despite upbeat news on initial jobless claims and retail sales, the markets are facing less-than-expected data on wholesale prices in the U.S. on Friday.

The Labor Department reported that its seasonally adjusted Producer Price Index for Final Demand declined by 0.1 percent in February, marking the first decline in three months and confounding economists that predicted an increase of 0.2 percent for the month. In January, the PPI showed that prices received by U.S. factories, wholesalers and retailers increased by 0.2 percent.

Year-over-year, producer prices increased 0.9 percent. That’s the smallest increase since last May and the latest signal that inflation remains benign, which gives the Federal Reserve plenty of leeway to keep interest rates near zero for the foreseeable future. High unemployment and paltry wage growth have forced the manufacturing chain to keep prices low in order to keep consumers making purchases.

Fed officials meet next Tuesday and Wednesday to make the latest decision on interest rates and the unwinding of its massive stimulus plan that began in September 2012 to prop-up the nation’s economy. The main bank bought $85 billion in Treasuries and mortgage-backed securities every month from the start of QE3 until December, but has since ratcheted down those purchases by $20 billion per month. The common consensus amongst economists is that the asset purchases will be trimmed by another $10 billion this month.

In January, the index was renamed from PPI for finished goods to PPI for final demand as it was officially expanded by include about construction and services, a formulation that is expected to closer mirror the Consumer Price Index as time moves on.

The index for final demand for services was an anchor in February as it dropped 0.3 percent, the largest decline since May 2013 (-0.4%). The vast majority of the decrease was attributed to margins for apparel, footwear and accessory retailing, with slumped 9.3 percent as retailers run heavy promotions to lure in shoppers. Last months decline was the largest on record.

Paring declines in the headline index was a 0.4-percent increase in prices for final demand goods last month, equaling the rise in January and December. Gains in this segment were broad, including a rise in prices for pharmaceutical preparations of 0.9 percent. Prices related to dairy products, residential natural gas, liquefied petroleum products, soft drinks, and eggs for fresh use also rose. Gasoline prices were the largest laggard, sliding 1.1 percent in February.

Prices for final demand foods were up 0.6 percent and final demand energy increased 0.5 percent. Excluding the volatile food and energy components, prices for final demand goods increased by 0.2 percent. This measure was formally referenced as “core” PPI.

A broader measure that has been added with the new calculations, producer prices minus food, energy and trade services, edged ahead by 0.1 percent. It is believed that this cocktail of prices will eventually become the new “core” PPI.

In a separate report, the first reading of the Thomson Reuters/University of Michigan Consumer Sentiment Index slid to 79.9 in March from a final 81.6 reading in February. That’s the lowest level since November and indicates that Americans are quite as optimistic about the current and future conditions of the economy as they were in recent months.

Wall Street doesn’t seem to be focusing on the softer economic reports this morning – or the upcoming referendum in Crimea or China’s economy for that matter – in early trading action. The Dow Jones Industrial Average is up by 37 points, the S&P 500 has climbed 4 points and the Nasdaq has edged up 7 points shortly after the opening bell.

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