Washington, July 15--Inflation in the production pipeline eased in June as economic activity cooled, validating the Federal Reserve's judgment that it will not need to raise interest rates aggressively this year.
The producer price index for finished goods fell for the first time since November 2003, declining 0.3% in a surprise to Wall Street, the Labor Department said today. The slump reflected a drop in food and energy prices. The closely watched "core index" -- which excludes those items -- rose 0.2% after a 0.3% gain in May.
Wall Street had expected a small increase in the overall index, although forecasters surveyed by Dow Jones Newswires and CNBC accurately predicted the gain in the core index. The numbers were broadly consistent with other recent measures of inflation, which have shown a moderation in the growth of prices.
Economists say the PPI, which reflects prices paid by factories, mines and utilities, can foreshadow changes in consumer prices about six months down the road. Investors pay close attention as a result. Fed policymakers have been surprised at the speed with which prices rose in the first half of 2004, but they say they remain confident inflation will remain tame this year.
In its report Thursday, the department said the drop in producer prices was due to a slump in food and energy prices, which had been rising since November. Food prices fell 0.6% after a 1.5% gain in May.
Energy prices dropped 1.6%, reversing the increase recorded in May. Gasoline prices fell 5.2%, the biggest drop in a year.
Prices of capital equipment moderated, rising 0.2% after a 0.3% gain in May. Prices of civilian aircraft rose 1.6%, marking the biggest increase in nearly 10 years. But prices of communication and related equipment fell 1.3% in the biggest decline in four months. Prices of passenger cars rose 1.1%, the same rate as in May. Prices of tobacco products rebounded, climbing 0.3% after a 0.5% decline in May.
Overall inflationary pressures moderated in annual terms. In the 12 months that ended June, producer prices were up 4%, down from a 5% rate in the year through May. The core index was up 1.8% in annual terms, compared with a 1.7%% gain in the year through May.
Inflationary pressures also moderated further up the production pipeline. Prices of crude, or unprocessed, goods rose 1.6%, the slowest rate in three months. Prices of intermediate, or semi-processed, goods rose 0.5%, less than half the rate in May.
