Producer Price Inflation Remained Subdued in February

Updated from 8:38 a.m.

The Producer Price Index rose 0.1% in February, while the core rate, which excludes volatile food and energy prices, fell 0.3%.

The numbers are better than expected, and stock futures rose as the figures were released from the Labor Department. This is the biggest drop in the core rate since August 1993.

The PPI, a key indicator of inflation at the producer level, has been rising slowly on a year-over-year basis, but today's report shows that the recent slowing in economic activity has served to restrain inflation, at least at the producer level.

Economists were expecting the overall PPI to remain unchanged and the core PPI to rise 0.1%. Today's report follows a 1.1% increase in January, and a 0.7% increase in the core rate; the sharp rise was offset by today's report.

The PPI measures what producers are paying for goods in various stages of processing, either at the finished, intermediate or crude level. When prices rise sharply, in order to protect profits and maintain costs, companies either have to increase productivity or cut costs, or they're faced with passing on those prices to consumers. Currently, with the economy decelerating, price inflation isn't much of a threat.

Today's report is unlikely to make much of a splash in terms of how the markets are viewing inflation and monetary policy. The existing trend, as confirmed by the year-over-year rate, remains intact. The year-over-year rate of growth in PPI is currently 4.0%, matching last year's rate, owing to sharp increases in energy prices (which have been passed on to the consumer). The core rate is moving higher, but slowly, and has been falling in recent months. The core rate is up 1.3% year-over-year, compared with 1% in February 2000.

Suppressing the core PPI figure was a sharp drop in automobile prices and a decline in capital equipment. Auto prices fell 1.5% and capital equipment prices fell 0.3%. By contrast, energy prices were higher. Natural gas prices gained 3.5% and overall energy prices increased 1.4%.

Producer Price Index for February. Source: Labor Department. Actual: 0.1%. Forecast: unchgd. Previous: +1.1%. Ex- food and energy: Actual: -0.3%. Forecast: +0.1%. Previous: +0.7%.

Housing starts for February. Source: Census Bureau. Actual: 1.647M. Forecast: 1.607M. Previous: 1.653M (rev.). Building permits: Actual: 1.67M. Forecast: 1.587M. Previous: 1.724M.