WASHINGTON (Reuters) – US producer prices recorded their biggest drop in more than five years in January as the cost of energy and a range of other goods tumbled, hinting at a disinflationary trend that could argue against the Federal Reserve raising interest rates.
Other reports on Wednesday showed housing starts fell last month, while manufacturing output rose marginally, signs of moderate economic growth early in the first quarter.
“That, along with persistently cool measures on inflation, will complicate decisions on the timing of a rate hike by the Fed. There is a clear consensus to obtain a liftoff this year, but the timing is still cloudy,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
The Labor Department said its producer price index (PPI) for final demand fell 0.8 per cent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 per cent in December. It was the third straight month of decline in the PPI.
In the 12 months through January, producer prices were unchanged, the weakest reading since November 2010 when the new year-on-year series started, and braking sharply after a 1.1 per cent rise in December.
Economists had forecast the PPI declining only 0.4 per cent last month and gaining 0.3 per cent from a year ago.
The decline in producer prices spilled over to the so-called core PPI as a strengthening dollar dampens imported inflation. A key measure of underlying producer price pressures, which excludes food, energy and trade services, fell a record 0.3 per cent last month after edging up 0.1 per cent in December.
While the Fed, which has a two per cent inflation target, views the tame price environment as transitory, the broad-based weakness could cause discomfort among some policymakers.
“If we continue to see core prices disinflating at the current pace … it will likely still the Fed’s hand in terms of the timing of the rate hike,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
“As much as they see the weakness as temporary, it would not be favourable for them to be tightening at a time when core inflation is moving further away from the target.”
Minutes of the central bank’s Jan 27-28 meeting published on Wednesday showed many policymakers leaning toward keeping interest rates lower for a while because of concerns, among others, over weakness in the core inflation measures.
Most economists have been expecting a rate hike in June, citing rapidly tightening labour market conditions. The Fed has kept its short-term interest rate near zero since December 2008.