Producer prices make unexpected gains in Oct

Washington

US PRODUCER prices unexpectedly rose in October, but the underlying trend continued to point to a benign inflation environment that could persuade the Federal Reserve to keep interest rates very low a bit longer.

The Labor Department said on Tuesday its Producer Price Index (PPI) for final demand increased 0.2 per cent, driven by a jump in prices in the services sector. The PPI had declined 0.1 per cent in September.

October also saw the introduction of new motor vehicle models, which could have contributed to the surprise rise in prices received by the nation's farms, factories and refineries.

Passenger car prices increased 1.0 per cent last month, the largest gain in five years.

Economists had expected producer prices to slip 0.1 per cent last month. In the 12 months through October, producer prices increased 1.5 per cent, the smallest advance since February, after rising 1.6 per cent in September.

The underlying trend in producer inflation remains tame. A broader measure, which excludes food, energy and trade services, edged up only 0.1 per cent last month after slipping 0.1 per cent in September.

This measure, which accounts for about two-thirds of final demand, was up 1.6 per cent in the 12 months through October.

Slowing global growth and falling oil prices are helping to keep a lid on inflation.

Fed officials largely view the current low inflation environment as transitory and believe the likelihood of inflation running persistently below the central bank's 2 per cent target has diminished somewhat since early this year.

Still, muted price pressures mean the Fed will probably be in no hurry to raise its short-term interest rate from near zero, where it has been since December 2008. US financial markets expect the first rate hike in mid-2015.

The dollar rose modestly against the yen and the euro, while prices for US Treasury debt pared gains. US stock index futures were little moved by the data.

Last month, prices for services rose 0.5 per cent, the largest rise since July 2013, after slipping 0.1 per cent in September. The rise largely reflected an increase in margins at wholesalers and retailers.

In October, energy prices fell 3.0 per cent, declining for a fourth straight month. Food prices increased 1.0 per cent, ending two straight months of declines.

In another development, US homebuilder sentiment rose in November, rebounding from its biggest drop since February in the prior month as builders' notions of the strength of housing market improved, the National Association of Home Builders (NAHB) said on Tuesday.

The NAHB/Wells Fargo Housing Market Index (HMI) advanced to 58 in November from 54 in October, the group said in a statement. The increase topped the median estimate of analysts polled by Reuters for a reading of 55.

November marked the fifth straight month with a reading above 50, which marks the threshold where more builders view market conditions as favourable than poor.

"Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery," said NAHB chief economist David Crowe. "After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015."

The single-family home sales component increased to 62 from 57, and the gauge of single-family sales expectations for the next six months climbed to 66 from 64. Prospective buyer traffic rose to 45 from 41. REUTERS