Food and energy fuel a wholesale-price jump

0 Comments | Deseret News (Salt Lake City), Apr 14, 2007 | by Associated Press

WASHINGTON -- Wholesale prices shot up by 1 percent in March, mostly reflecting more expensive gasoline and food.

However, when those volatile energy and food prices are removed, all other prices were flat in March, suggesting that inflation is not spreading throughout a wider range of goods in the economy, the Labor Department's report, released Friday, also showed.

The 1 percent increase in the Producer Price Index, which measures the costs of goods before they reach store shelves, came after a 1.3 percent spike in February. The flat reading on "core" prices marked an improvement from a 0.4 percent rise in the previous month.

The pickup in overall wholesale inflation was worse than the 0.7 percent increase economists were expecting. On the other hand, the flat reading on core prices was better. Analysts were forecasting a 0.2 percent rise there.

"Food and energy costs are surging, but if you don't have to eat and drive, life is not that bad," quipped Joel Naroff, president of Naroff Economic Advisors. "This was a pretty good report, if you are a central banker. If you live in the real world, it was not pleasant news."

In a separate report Friday, the Commerce Department said the U.S. trade deficit improved for a second month as oil imports fell sharply.

The gap between what America sells abroad and what the country imports dipped by 0.7 percent to $58.4 billion in February, the smallest imbalance since November. The improvement came even though exports fell by $2.8 billion during the month, reflecting lower sales of a variety of manufactured goods from computer accessories to industrial machinery and civilian aircraft.

But imports declined by an even larger $3.2 billion, with the tab for foreign oil falling to the lowest level in 20 months. However, with oil prices again rising on global markets, that improvement could be short-lived.

From the Federal Reserve's perspective, the biggest risk facing the economy right now is that inflation doesn't recede as policymakers expect. The Fed cares so much about inflation because when it starts spiraling it can be hard -- and painful -- to control. Inflation eats away at workers' paychecks and people's investments and can put a squeeze on companies' profits.

The Fed hasn't budged a key interest rate since August. Before that it had steadily boosted rates for two years to fend off inflation. The Fed hasn't ruled out another rate increase if inflation were to show signs of worsening.

Although the Fed watches a variety of inflation barometers, it is especially interested in the behavior of "core" prices -- those that exclude energy and food, which tend to swing widely from month to month. The good behavior of core prices in March suggested that inflation is not in danger of spreading throughout the economy. It also suggested that companies are acting with restraint in passing along their higher fuel costs in the prices they charge wholesalers.

The inflation report showed that all energy prices rose by 3.6 percent in March, the most since November. Gasoline prices jumped by 8.7 percent, also the highest since November. Residential natural gas prices increased 3.3 percent. Diesel fuel prices shot up 8.8 percent. Prices for liquefied petroleum gas, such as propane, went up 6.5 percent.