June Wholesale Prices Climb But Core Rate Drops

WASHINGTON – A sharp rise in energy costs pushed U.S. wholesale prices up at a steeper-than-expected rate last month but a closely watched gauge of core inflation eased, the government said Friday.

The Producer Price Index (search), which measures prices paid at the farm and factory gate, rose 0.5 percent in June, the Labor Department (search) said. But it said much of that gain could be pinned on a steep 3.4 percent increase in energy prices, with some contribution from a 0.4 percent rise in food costs.

Excluding food and energy -- considered to have volatile prices -- the so-called core PPI (search) -- actually fell 0.1 percent, showing an absence of underlying inflation pressures that could keep alive fears of deflation, a broad fall in consumer prices. Over the past 12 months, the core PPI has fallen 0.3 percent.

"That probably will prolong some of the concerns that people have about deflation," said Patrick Fearon, an economist with A.G. Edwards & Sons in St. Louis, Missouri.

Economists on Wall Street had expected producer prices to rise 0.2 percent, with the core rate up 0.1 percent. Markets showed muted reaction to the data and another government report showing the U.S. trade deficit near record levels in May.

Energy prices had tumbled in April and May, reversing surges earlier this year that accompanied the buildup to the Iraq war. However, oil prices have since moved higher as restarting Iraqi oil output has taken longer than expected.

The producer price report showed a steep 7.6 percent rise in the cost of gasoline and a 9 percent increase in the price of home heating oil. The cost of residential natural gas costs rose 3.6 percent.

Tempering the rise in food and energy costs were drops in the cost of cars and light trucks. Car prices slid 0.7 percent, while the cost of light trucks fell 1.5 percent.

While vehicle prices have been volatile due to on-and-off sales incentives from automakers, car prices have fallen 1.3 percent over the past year and the cost of trucks has dropped 3.2 percent.

Communication equipment prices also tumbled, sliding 0.7 percent, their biggest drop since October of last year.

John Lonski, chief economist with Moody's Investors Service in New York, said the report did not change the inflation outlook "one bit," although it could spell profit trouble for companies that may not be able to pass along oil prices rises to their customers.

"The PPI report is of some concern because it points toward a squeezing of profit margins by rising energy costs amid a lack of pricing power," Lonski said.