Washington, DC, October 17, 2006—The producer price index dropped by 1.3% in September, as the price of energy goods tumbled at the fastest rate in 20 years, according to the Labor Department. It was the biggest decline in the seasonally adjusted producer price index in three years, reported.
The core producer price index, which excludes food and energy costs, rose a surprising 0.6%, the most since January 2005, as the prices of motor vehicles jumped at the fastest rate in more than 15 years.
Economists were taken by surprise. They expected a smaller 0.7% decline in the headline PPI, and also expected a smaller 0.2% gain in the core PPI.
The PPI had risen 0.1% in August, while core prices had fallen two months in a row.
The mixed inflation reports shows the dramatic impact of falling crude oil prices, but also shows persistent inflation at the producer level that won't let the Federal Reserve breath easy.
Producer prices are up 0.9% in the past year, while core prices are up 1.2%.
The Labor Department will report on the consumer price index on Wednesday. Economists expect headline inflation to fall 0.3% while core prices are expected to rise 0.2%
The Federal Open Market Committee meets next week. Most observers expect the committee to hold overnight lending rates steady at 5.25%.
In the PPI report, energy prices fell 8.4%, the biggest decline since July 1986. Gasoline prices fell a record 22.2%, barely besting a 20-year-old record. Heating oil prices fell 18.5%, while natural gas prices rose 1.8%.
Prices of capital goods increased 0.6%, largely because the prices of light motor trucks rose 3.5%, the biggest rise in 21 years. The large gain is likely due to a seasonal adjustment problem revolving around dealer incentives.
The prices of core consumer goods rose 0.5%. The prices of passenger cars increased 2.8%, the most in 16 years. Consumer food prices rose 0.7%.
The inflation picture was equally mixed further back in the production pipeline.
Intermediate goods prices fell 1.4%, as intermediate energy goods prices fell 7.5%. Core intermediate goods prices - one of the Fed's favorite measures of underlying inflation - rose 0.1% and is now up 7.4% in the past year.
Crude goods prices fell 3.4% as crude energy prices fell 8.4%. Prices of basic industrial materials rose 1%, with large increases in metals and construction materials.
