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February wholesale prices drop 0.6 percent
W Economy Heal
In this photo made March 3, 2010, customers look at bagels at Costco in Mountain View, Calif. Prices at the wholesale level plunged in February by the largest amount in seven months as a big drop in energy prices offset higher food costs. - photo by Associated Press

WASHINGTON - Prices at the wholesale level plunged in February by the largest amount in seven months as a big drop in energy prices offset higher food costs.

The Labor Department said Wednesday that wholesale inflation dropped 0.6 percent in February, much larger than the 0.2 percent decline economists had expected. Excluding food and energy, prices edged up a slight 0.1 percent, in line with expectations.

The deep recession and weak economic rebound are keeping inflation at bay and giving the Federal Reserve leeway to maintain record low interest rates in an effort to build momentum from stronger economic growth.

While overall wholesale prices have risen 4.4 percent over the past 12 months, core inflation, which excludes energy and food, is up a much more subdued 1 percent over the past year.

"Underlying price pressures in the United States remain very subdued," said Paul Dales, an economist at Capital Economics.

Economists said they expect inflation pressures to ease even more in coming months because many of the dampening effects on inflation from the steep recession have yet to be felt.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he expected the 12-month rate for core wholesale prices to dip from the current 1 percent to below zero in coming months.

The 0.6 percent fall in Labor's Producer Price Index in February was the biggest decline since a 1.2 percent drop last July. In January, wholesale prices had surged by 1.4 percent, driven higher by rising energy costs.

Last month, energy prices plunged by 2.9 percent with most of that decline reflecting a 7.4 percent drop in gasoline costs.

However, gasoline pump prices have resumed rising over the past few weeks and now stand at a national average of $2.79 according to automotive club AAA's daily fuel gauge. That is up from $2.62 a month ago and $1.91 a year ago.

The PPI report showed food costs rising by 0.4 percent in February, the fifth straight monthly gain. The food increase last month reflected big price gains for fresh vegetables, eggs and meat.

Outside of food and energy, the price for new cars rose 0.5 percent, the largest advance since June, while the price of carpets and rugs increased 1.6 percent, the biggest advance since last April.

The government will report on consumer prices Thursday. Economists are expecting that report to also show subdued inflation with both overall retail prices and core prices rising by just 0.1 percent.

The country's worst recession since the 1930s has kept a lid on prices, allowing the Federal Reserve to keep a key interest rate at a record low of zero to 0.25 percent for the past 15 months in an effort to jump-start economic growth.

The Fed concluded its latest meeting on Tuesday by leaving its federal funds rate unchanged and declaring once again that it planned to keep rates "exceptionally low" for an "extended period" of time.

Most economists believe the Fed will leave rates unchanged until the unemployment rate, currently at 9.7 percent, begins to come down on a sustained basis, something they don't think will occur until this summer.

In a statement at the conclusion of Tuesday's meeting, Fed policymakers said they believed that "inflation is likely to be subdued for some time."


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