Wholesale prices in US fall by most in three years on fuel

[WASHINGTON] Wholesale prices in the US declined in December by the most in three years, showing little sign that inflation's bubbling up amid plunging energy costs.

The 0.3 per cent decrease in the producer-price index was the biggest since October 2011 and followed a 0.2 per cent drop the prior month, a Labour Department report showed on Thursday in Washington. The median estimate in a Bloomberg survey called for a 0.4 per cent fall. Over the past 12 months, wholesale prices rose 1.1 per cent.

A sustained plunge in energy prices is keeping a lid on inflation throughout the pipeline, from bills for businesses to the consumer's cost of living. Weak price growth has convinced Federal Reserve officials to remain "patient" in their timing of the first interest rate increase since 2006 after ending monthly asset purchases three months ago.

"The energy story is going to continue to be the dominant driver on headline inflation," Sam Bullard, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report.

"Typically, at this point in time, producers will test their pricing power and see if they can pass along any kind of increased costs that they may have, and they may not be able to do so this time around."

The median estimate was based on a survey of 75 economists. Projections ranged from a drop of 1.6 per cent to a 0.1 per cent advance.

Another report Thursday showed more Americans unexpectedly filed applications for unemployment benefits last week, indicating companies let go of seasonal workers following the holidays.

Jobless Claims Jobless claims climbed by 19,000 to 316,000 in the week ended Jan 10, the most since early September, from a revised 297,000 in the prior period, according to figures from the Labour Department. The median forecast of 48 economists surveyed by Bloomberg called for 290,000.

Excluding food and fuel, producer prices rose 0.3 per cent in December after being little changed the prior month. The so- called core rate was forecast to rise 0.1 per cent, according to the Bloomberg survey. Over the past 12 months they increased 2.1 per cent after a 1.8 per cent gain the prior month.

The bigger-than-projected advance on core prices reflected growing margins at fuel retailers, indicating service stations were slow to lower the costs of items such as gasoline as crude prices plummeted.

Also taking out trade services, which is one of the most volatile components of the new PPI index, costs rose 0.1 per cent last month and were up 1.3 per cent from December 2013.

Rising Margins The cost of services increased 0.2 per cent in December, reflecting the higher profit margins at retailers and wholesalers. Prices for goods dropped 1.2 per cent last month and were down one per cent since December 2013.

Energy costs slumped 6.6 per cent last month, the most since records began in November 2009.

Prices at the gasoline pump have been sliding since late September, helping to cushion household budgets. The average price of a gallon of regular unleaded fuel was US$2.10 on Jan 13, its lowest level since May 2009, according to data from motoring group AAA.

The fall in energy prices last month was paired with a 0.4 per cent decrease in wholesale food as costs for cheese vegetables and meats all declined.

The drop in energy costs is weighing on the Fed's preferred inflation gauge. The personal consumption expenditures index rose 1.2 per cent in November from a year earlier and has been short of the central bankers' 2 per cent goal since April 2012, according to Commerce Department data.

Thursday's producer price index reading is one of three monthly inflation gauges from the Labour Department. The consumer-price index, due tomorrow, declined 0.4 per cent in December, according to the Bloomberg survey median. A report earlier this week showed the cost of imported goods fell 2.5 per cent last month.

BLOOMBERG