Inflation at wholesale level shows moderation in August

Tuesday, September 19th 2006, 8:32 am
By: News On 6

WASHINGTON (AP) _ Prices at the wholesale level edged up modestly in August, providing further evidence that inflation pressures are easing.

The Labor Department reported that wholesale prices edged up 0.1 percent last month as gasoline prices fell, helping to offset a jump in food costs.

Outside of energy and food, core inflation was even better behaved, falling by 0.4 percent after a 0.3 percent decline in July. It marked the first back-to-back declines in core inflation in more than three years.

In other economic news, home construction dropped a sharp 6 percent in August, a much bigger decline than analysts had been expecting.

The Commerce Department said that work was started on 1.665 million homes at a seasonally adjusted annual rate last month.

The good news contained in the department's Producer Price Index followed a report last week that inflation at the consumer level also moderated in August, rising by just 0.2 percent.

Both months reflected a slowdown in energy prices, which rose by just 0.3 percent at the wholesale level in August after a huge 1.3 percent jump in July. Gasoline prices actually fell at the wholesale level last month, dropping 2.2 percent, the biggest decline in seven months.

With surveys showing further gasoline price declines in recent weeks, analysts were looking for more good news on inflation in the September price reports.

Falling gasoline prices will leave consumers with more money to spend on other items. This should provide fuel to keep the economy moving ahead, easing worries that the recent slowdown in consumer spending could worsen into an outright recession.

Analysts said the Federal Reserve appears close to achieving its hoped-for soft landing in which growth slows enough to keep inflation pressures contained but not so much that the economy dips into a downturn.

The Fed in August left interest rates unchanged, marking the first pause after 17 consecutive rate hikes. Economists are expecting the Fed to keep rates on hold when they meet again on Wednesday.

For August, the 2.2 percent drop in gasoline prices, the biggest fall since an 11.2 percent plunge in February, helped to offset increases in other types of energy. Natural gas destined for home use was up 1.6 percent while electricity for the home rose by 1.3 percent.

Food costs shot up 1.4 percent in August after having declined by 0.3 percent in July. The price of fresh vegetables, fruit and eggs all posted big increases.

Outside of the volatile food and energy sectors, the 0.4 percent drop in core inflation reflected big declines in the cost of new vehicles. The price of light trucks dropped by 3.4 percent while the cost of passenger cars was down 2.6 percent.

The latest price changes showed wholesale prices have risen by 3.7 percent in the past 12 months while core inflation, which excludes energy and food, was up by just 0.9 percent.