Weak profit margins dampen U.S. producer inflation

Fri Mar 13, 2015 1:24pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. producer prices fell in February for a fourth straight month, pointing to tame inflation that could argue against an anticipated June interest rate hike from the Federal Reserve.

The Labor Department said on Friday its producer price index for final demand declined 0.5 percent as profit margins in the services sector, especially gasoline stations, were squeezed, and transportation and warehousing costs fell.

"The underlying message appears to be that pipeline inflationary pressures remain quite weak, even as energy prices have stabilized and gasoline prices have drifted modestly higher," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The PPI had dropped 0.8 percent in January. In the 12 months through February, producer prices fell 0.6 percent, the first decline since the series was revamped in 2009.

Economists had forecast the PPI rising 0.3 percent last month and remaining unchanged from a year ago.

Prices for U.S. government debt gained marginally on the inflation data. U.S. stock indexes fell sharply, as a strong dollar threatened to erode the profits of multinational companies and tumbling crude prices pressured energy firms including Chevron Corp and Noble Corp.

While the weak inflation backdrop would normally be associated with a struggling economy, there appears to be little reason to worry given the fairly robust labor market.

"We would not take the producer prices report as a sign that the economy is secretly rotten if you pull back the tarp and take a look at the hull. The economy is creating millions of jobs," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.   Continued...

Clif Small is seen getting a 2013 Accord ready to come off the line during a tour of the Honda automobile plant in Marysville, Ohio October 11, 2012.    REUTERS/Paul Vernon