Gasoline Pushed Up Producer Prices In May

A double-digit jump in the price of gasoline pushed inflation at the wholesale level up in May, but tame increases for most other goods suggested that price increases were largely contained and businesses would not react by raising prices.

The Labor Department said yesterday that the Producer Price Index, a national survey of prices before they reach retail buyers, accelerated 0.9 percent in May, from 0.7 percent in April. From May 2006 to May 2007, they rose 4.1 percent.

But the gains in wholesale inflation were not as great as the numbers might suggest, economists said. The core level of producer inflation, which excludes food and energy costs, rose by a relatively mild 0.2 percent, a sign that inflation had been contained last month.

The thing to notice is that core Producer Price Index has been almost flat for three straight months, Kevin Harris, chief economist with Informa Global Markets, said. Theres very little evidence that producers are pushing prices forward from the intermediate level to the consumer. Theyre just not doing it, and that is a definite shift.

Except for a reading of 0.4 percent in February, core producer prices have not risen faster than 0.2 percent a month since November. At the same time, core consumer prices have registered monthly increases of 0.1 percent to 0.3 percent since October. The Labor Department today is to release the Consumer Price Index data for May, which economists and investors will study for clues about whether inflation is indeed settling down.

Investors concerns about inflation played a role in the drop in stock prices and increase in bond yields early in the week. But yesterday, the producer price report helped stocks extend Wednesdays gains. Investors saw the small uptick in core inflation as a sign that the Federal Reserve would not raise interest rates.

Over all, wholesale energy costs increased 4.1 percent in May, compared with 3.4 percent in April. That was the biggest jump so far this year. Much of that was due to a 10.2 percent rise in the cost of gasoline, the largest gain in six months.

Prices for many consumer items, however, either declined or rose modestly. The wholesale prices of motor vehicles dipped 0.2 percent. Pharmaceuticals increased 0.4 percent; household furniture rose 0.1 percent. Food prices, which have edged higher in recent months, fell nationwide for the first time since late in 2006.

These declines or relatively small increases have helped businesses hold down prices.

Kenneth Beauchemin, an economist with Global Insight, wrote in a research report that the low producer price reading and the recent slowdown in core consumer inflation underscores the ability and willingness for producers to absorb temporary, albeit dramatic, swings in relative energy prices.

But further back on the production pipeline, there were signs that inflationary pressure could be growing. The price of intermediate materials, which includes items used in manufacturing like chemicals, lumber and metals, rose 1.1 percent in May, compared with 0.9 percent in April. Energy costs were a significant factor.

And the price of crude materials, a step before intermediate materials in the production chain, rose 2 percent, in contrast to a drop of 1.5 percent in April.

That suggests the possibility of seeing a touch more core finished-goods inflation down the road, Andrew Tilton, an economist with Goldman Sachs, said.

If businesses are willing to keep absorbing those costs, consumers would not have to worry, he said. Ultimately, what you care about is how much makes its way to consumer products, and so far that portion seems to be muted.

Separately yesterday, the Labor Department said that the number of people filing first-time unemployment claims last week was unchanged from the week before, at 311,000.

Gary Bigg, a Bank of America economist, wrote: Over the past seven weeks, initial unemployment claims have moved within a narrow range of 296,000 to 314,000. This indicates that the labor market remains stable.

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