Producer prices show unexpected rise, but inflation remains muted

By Holly LaFon

The Producer Price Index rose unexpectedly in October, led by an advance in  the cost of services, the U.S. Bureau of Labor Statistics reported Tuesday.

The PPI, which measures prices at the wholesale level, grew 0.2 percent last month.  That upturn was something of a surprise:  because fuel prices have continued their months-long decline, economists had been expecting the index to decline by 0.1 percent.

But falling energy costs weren’t enough to offset a rise in prices for services.

The October increase, which follows a 0.1 percent decline in September and is up a 1.5 percent over the past twelve months, does not necessarily signal looming inflationary pressures, according to some economists.

“The numbers came in higher than expected, but I don’t think there’s any real sign of inflation,” said David Sloan, senior economist at 4cast. “If you look at the breakdown, the strength was in services. Apart from the services gain it was a pretty soft report.”

In final demand services, the fuels and lubricants retailing category saw the greatest increase at 26.1 percent, representing almost 40 percent of the final demand services index increase. TV, video and photographic equipment and supplies grew 5.8 percent, the second largest advance.

Trades services accounted for almost 90 percent of the advance in the intermediate demand PPI. Three drivers led the gain in intermediate demand services, Joseph Kowal, economist with the Bureau of Labor Statistics, said: fuels and lubricants, up 26.1 percent; metals, minerals and ores, up 2.9 percent; and machinery and equipment parts and supplies wholesaling, up 1.4 percent.

“The increase in parts and supplies for machinery and equipment is smaller than others but constitutes a large portion for trade services,” he said.

The core PPI gained 0.4 percent, also led by one category, trade services. Core goods prices were less robust, declining 0.1 percent, with pharmaceutical prices up 0.6 percent and construction prices up 0.5 percent.

“While the core PPI was firmer than expected, the upside surprise was primarily in one category (trade margins), and we think inflationary pressures remain muted,” J.P. Morgan said in a research note.