By Courtney Schlisserman
Jan. 20 (Bloomberg) -- Wholesale prices in the U.S. rose at a slower pace in December, showing the economy is recovering without the immediate threat of inflation.
The 0.2 percent increase in prices paid to factories, farmers and other producers followed a 1.8 percent jump in November, according to Labor Department data released today in Washington. The gain was more than anticipated and reflected higher food costs. Excluding food and fuel, so-called core prices were unchanged.
An unemployment rate projected to average 10 percent this year and excess capacity are giving companies room to hold the line on prices. Few signs of inflation will allow the Federal Reserve to keep interest rates near zero in coming months to help fuel the economic recovery.
“We’re not looking at any sort of major inflation pressures emanating from the manufacturing sector,” said Jonathan Basile, an economist at Credit Suisse in New York. The Fed’s view on inflation is that it’s “contained, subdued and that’s what the PPI is telling us,” he said.
Stock-index futures held earlier losses after a separate report showed housing starts dropped more than expected in December. Futures on the Standard & Poor’s 500 Index expiring in March fell 0.5 percent to 1,139.8 at 8:41 a.m. in New York.
Housing Starts
The Commerce Department said beginning construction declined 4 percent to 557,000 homes at an annual rate last month, signaling bad weather kept builders away from worksites. Starts were projected to fall to a 572,000 pace, according to the median estimate in a Bloomberg News survey. Building permits, a sign of future construction, climbed to the highest level in a year.
Economists forecast no change in December producer prices, according to the median of 73 projections in a Bloomberg survey. Estimates ranged from a decrease of 0.5 percent to an increase of 0.5 percent.
Prices excluding food and energy were forecast to rise 0.1 percent after a 0.5 percent increase a month earlier, according to the survey median. Core prices have increased in one of the last four months.
Wholesalers received 4.4 percent more for their goods last year, compared with a 0.9 percent decrease in 2008. Core producer prices rose 0.9 percent in 2009, the smallest annual gain since 2002.
Year-over-year costs may keep rising the next few months as the plunge in fuel prices at the depths of the recession in late 2008 and early 2009 drops out of the calculations.
Energy Costs
Compared with a month earlier, energy costs fell 0.4 percent in December, led by cheaper gasoline and natural gas. The cost of crude oil on the New York Mercantile Exchange has since risen, reaching an intraday high of $83.95 a barrel on Jan. 11 after closing at $69.51 on Dec. 14.
The cost of food increased 1.4 percent from November, led by higher pork, dairy and vegetable prices. The cost of pork showed the biggest gain since January 1999, while dairy products were up the most since July 2007.
Core costs were restrained by cheaper business equipment, women’s apparel and trucks.
Producer prices are one of three monthly inflation gauges reported by the Labor Department. Consumer prices rose 0.1 percent in December, while the cost of imported goods was unchanged, according to data released last week.
Interest Rates
Fed policy makers meet Jan. 26-27 to discuss the direction of the benchmark overnight lending rate between banks. At their last meeting in December, central bankers repeated their pledge to keep the rate near the historic low of zero to 0.25 percent for an “extended period.” They also said policy is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”
The Fed’s long-term forecast for its preferred measure of inflation, the Commerce Department’s index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.5 percent to 2 percent. That gauge, which is typically lower than the CPI, was up 1.4 percent in the 12 months ended in November.
Consumers in the Reuters/University of Michigan preliminary survey, released Jan. 15, said they expect an inflation rate of 2.8 percent over the next five years. Those figures are tracked by Fed policy makers.
Plant-Use Rate
Helping limit inflation is data on capacity utilization. Economists track operating rates to gauge factories’ ability to produce goods with existing resources and lower rates reduce the risk of bottlenecks that can force prices higher.
The proportion of plants in use rose to 72 percent in December, Fed figures showed Jan. 15. Capacity averaged 80 percent over the past two decades.
Crude oil prices that rose 78 percent in 2009 limited Alcoa Inc.’s profit in the fourth quarter. The world’s largest U.S. aluminum producer said Jan. 12 that profit excluding certain items was 1 cent a share, trailing the 6-cent average estimate of analysts.
New York-based Alcoa said it had to buy 207,000 tons of aluminum on the open market to satisfy customer purchase agreements while also coping with higher energy costs and currency exchange.
Costs of some goods are reflecting higher prices at the earliest stage of production.
Raw Materials
Dan DiMicco, chief executive officer at Nucor Corp., said Jan. 14 that steel prices have been rising primarily because of higher raw material costs, rather than a pickup in U.S. demand.
“If you tell me what will happen to raw materials, I will tell you what will happen to prices, because right now the economy is terrible,” DiMicco said in an interview with Bloomberg Television. Nucor is the second-largest U.S. steelmaker by 2008 sales behind U.S. Steel Corp.
Steel prices surged in the second half of last year after the nation’s deepest recession in seven decades cut demand in the first six months.
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