WASHINGTON, Aug 16 (AFP): Core US wholesale inflation last month staged its biggest fall in nearly a year, according to data yesterday that bolstered the Federal Reserve's rationale for keeping interest rates steady.
Wall Street welcomed the news with the Dow Jones share average rocketing more than 132 points to close at 11,230.26.
But some economists warned that the details of the producer price index (PPI) report could still give the Fed pause for thought.
The Labour Department reported that the headline PPI rose just 0.1 per cent in July from June. But the core rate-excluding food and energy-fell by 0.3 per cent due to steep declines in automobile prices.
Wall Street analysts had predicted the core PPI rate would rise 0.2 per cent, and the headline rate by 0.4 per cent.
The unexpected fall in the core rate of producer inflation would appear to justify the Fed's decision a week ago to call off a campaign of interest rate hikes stretching back to June 2004.
The US central bank kept the Fed funds pegged at 5.25 per cent after 17 hikes running, arguing that slowing economic growth would curb price pressures. But some analysts said the Fed was underestimating inflation.
The Fed pays particular attention to the core readings, arguing that food and energy are too volatile to be reliable gauges of inflation. Wednesday will see the government release the consumer price index (CPI) for July.
Global Insight US economist Kenneth Beauchemin said the PPI report "offers a measure of vindication" to the Fed's decision of Tuesday last week.
"Given the relatively volatile behaviour of producer prices, however, the Fed will eagerly await tomorrow's report on the consumer price index for a sharper signal on the current inflationary condition," he added.
Some economists said the better PPI readings masked worrying rises in prices of intermediate goods and crude oil that would keep the Fed on its toes.
"Agricultural prices, which have been driven higher by a global drought and ethanol demand, remain on our radar," Wachovia economist Jason Schenker said, noting that wheat prices are up 27.1 per cent year-over-year.
"Metals prices continue to threaten core producer inflation," he said. "Only with a decline or moderation in commodity prices can we expect producer inflationary pressures to really ease."
The July fall in core PPI matched the 0.3 per cent decline seen in October last year, which was the biggest since the index tumbled by 0.5 per cent in April 2003.
It was led by a big drop of 3.1 per cent in prices for light trucks, while passenger cars were down 0.8 per cent.
The Labour Department said prices fell also in diverse other sectors, including medicines, civilian aircraft, mobile homes, newspaper circulation, railroad equipment and measuring equipment.
Food prices were down 0.3 per cent in the month. Energy prices rose 1.3 per cent, with gasoline prices rising 0.7 per cent to add to the pain being felt by US motorists this summer.
Compared with a year earlier, the headline PPI was up 4.2 per cent in July after rising 4.9 per cent in June.
The base index rose 1.3 per cent year on year, compared with 1.9 per cent in June. Not since March 2004 has the core rate gone up by so little. But Joel Naroff of Naroff Economic Advisers warned: "The headline number looks great, but the beauty may be only skin deep."
He noted that stripped of lower food costs, consumer goods prices continued a sharp rise in July.
"That hardly tells anyone that consumer prices inflation will fade anytime soon," he said.