US producer prices fell more than twice as much as expected last month on a record drop in gasoline prices, but core prices jumped amid a rebound in autos that may vex the Federal Reserve as it weighs inflation risks.
The Labour Department said yesterday that producer prices declined 1.3 per cent in September, the steepest drop since April 2003. This came with a 22.2 per cent fall in gasoline prices that broke the previous record of a 22.1 per cent drop, set in March 1986.
The core producer price index, which strips out volatile food and energy costs, advanced 0.6 per cent after a 3.5 per cent rebound in light motor truck prices, the largest increase since October 1985, following a 3.4 per cent dip the previous month.
Passenger cars rose 2.8 per cent - the largest gain in 16 years - after falling 2.6 per cent in August.
Stripping out those sharp rises in truck and car prices, core producer prices would have risen 0.1 per cent, a Labour Department official said.
US stock futures and Treasury bond prices lost ground on news of the advance in core prices, while the dollar was little changed.
It's mostly a rebound in motor vehicle prices that exaggerated the jump in the core, said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.
"The trend is still one of moderation and with economic growth slowing, we should inflation moderating further later this year. This doesn't mean that we are not going to see a troubling number from time to time," he said.
Wall Street economists had expected the report, which comes a week ahead of a Federal Reserve meeting on interest rates, to show overall producer prices declining 0.6 per cent last month while core prices were forecast to rise 0.2 per cent.
Financial markets believe the US central bank will hold interest rates steady not just at its October 24-25 meeting, but through the end of the year. But the mixed signals from producer prices underline the tricky task facing policy-makers.
I think the Fed will be confused on the number but I think the market is looking at the 0.6 (per cent rise in core prices) and saying the Fed is less likely to cut, said Robert Macintosh, chief economist at Eaton Vance Management in Boston.
Energy prices at the producer level dropped 8.4 per cent in September, the largest drop since July 1986, after a gain of 0.3 per cent in August.
In other data out yesterday, US chain store sales rose 3.5 per cent in the week ended October 14 compared with the same week a year ago, according to Redbook Research. Sales at US retailers rose 1.4 per cent when compared with the same period in September, it said.