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U.S. Producer Prices Drop More Than Expected Amid Slump In Energy Prices

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Partly reflecting a steep drop in energy prices, the Labor Department released a report on Thursday showing U.S. producer prices declined by much more than expected in the month of February.

The Labor Department said its producer price index for final demand slid by 0.6 percent in February after climbing by 0.5 percent in January. Economists had expected the index to edge down by 0.1 percent.

The bigger than expected decrease in producer prices came as energy prices plummeted by 3.6 percent in February after falling by 0.7 percent in January, with a 6.5 percent nosedive in gasoline prices leading the way lower.

Food prices also showed a significant decrease, plunging by 1.6 percent in February after inching up by 0.2 percent in the previous month.

However, the report also showed an unexpected decrease in core producer prices, which exclude food and energy prices.

Core producer prices fell by 0.3 percent in February following a 0.5 percent increase in January, while economists had expected core prices to inch up by 0.1 percent.

The unexpected drop in core prices came as prices for services declined by 0.3 percent in February after climbing by 0.7 percent in January.

The Labor Department said over 70 percent of the broad-based decrease can be traced to a 0.7 percent pullback in prices for trade services, which jumped by 1.2 percent in the previous month.

Prices for transportation and warehousing services also slid by 0.6 percent in February after plunging by 1.6 percent in January, while prices for other services edged down by 0.1 percent after rising by 0.6 percent.

With the bigger than expected monthly decrease, the annual rate of producer price growth tumbled to 1.3 percent in February from 2.1 percent in January.

Core producer prices in February were up by 1.4 percent compared to the same month a year ago, reflecting a deceleration from the 1.7 percent growth in the previous month.

A note from economists at Oxford Economists said the producer price data along with yesterday's report on consumer prices underscore that price pressures were extremely tame ahead of the coronavirus.

The report released by the Labor Department on Wednesday showed a modest increase in U.S. consumer prices in the month of February.

The Labor Department said its consumer price index inched up by 0.1 percent in February, matching the uptick seen in January. Economists had expected prices to come in unchanged.

Consumer prices edged higher as higher prices for food and shelter more than offset a steep drop in energy prices.

The report said core consumer prices, which exclude food and energy prices, rose by 0.2 percent for the second consecutive month. The increase in core prices matched economist estimates.

Compared to the same month a year ago, consumer prices were up by 2.3 percent in February, reflecting a slowdown from the 2.5 percent jump in January.

On the other hand, the report said the annual rate of growth in consumer prices edged up to 2.4 percent in February from 2.3 percent in the previous month.

"Looking ahead, the disinflationary impact from the virus and the historical plunge in oil prices will exert strong downward pressure on prices," said the note from economists at Oxford Economists.

The economists added, "With GDP growth set to hit stall-speed in H1, the Fed will likely lower rates down to the effective lower bound (ELB) by mid-year."

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