a-1-7-percent

By Bob Willis Oct. 20 (Bloomberg) — Wholesale prices in the U.S. unexpectedly fell in September on lower fuel costs, a sign inflation remains muted and the Federal Reserve has leeway to keep borrowing costs low as the economy recovers. The 0.6 percent decrease in prices paid to factories, farmers and other producers was the second drop in three months and followed a 1.7 percent rise in August, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices declined 0.1 percent. Companies won’t be able to pass on higher costs to consumers until demand is more sustained as the economy emerges from the worst recession in seven decades. Citing “subdued” inflation, Federal Reserve policy makers pledged last month to keep the benchmark interest rate at a record low for an “extended period.” “Inflation is not an immediate concern,” Ryan Sweet , an economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “We’re probably going to see core inflation continue to soften over the next couple of months” and “this will likely keep the Fed on the sidelines for the foreseeable future.” Builders broke ground in September on fewer houses than anticipated and building permits dropped, signaling the market will slow once government incentives have elapsed, a separate report from the Commerce Department showed today. Housing Permits Housing starts rose 0.5 percent to an annual rate of 590,000 from a 587,000 pace in August that was lower than previously estimated. Permits, a sign of future construction, fell for the second time in the past three months. Stock futures trimmed gains after the reports. Futures on the Standard & Poor’s 500 Index added 0.3 percent to 1,094.00 at 8:55 a.m. in New York after climbing as much as 0.7 percent earlier. Economists forecast producer prices would remain unchanged, according to the median of 75 forecasts in a Bloomberg News survey. Estimates ranged from a decline of 0.8 percent to a gain of 0.5 percent. Excluding food and energy, costs were projected to increase 0.1 percent, according to the Bloomberg survey. Compared with a year earlier, companies paid 4.8 percent less for goods, today’s producer-price report showed. Core costs were 1.8 percent higher than a year earlier. Energy costs dropped 2.4 percent, led by a 9.8 percent fall in heating oil and a 5.4 percent decline in gasoline. Gasoline prices in September averaged $2.55 a gallon, compared with $2.62 in August, according to AAA. Energy Costs Energy costs plunged 22.1 percent from a year earlier, today’s report showed. The cost of food fell 0.1 percent from August, led by a 9.8 percent decline in eggs. The decrease in core costs reflected a 1.4 percent decline in light trucks and cheaper pet food. The cost of passenger cars gained 1 percent. The end of the government’s “cash-for-clunkers” trade-in program on Aug. 24 meant factories had to resort to boosting incentives to dealers to sell cars and that will lead to lower sales prices, said Jonathan Basile , an economist at Credit Suisse Holdings Inc. in New York. Dealer Incentives “Factory-to-dealer incentives are coming back,” Basile said. “That should hold back any core PPI pressure.” General Motors Co.’s “average incentive spend” was $3,700 in September, up $500 from August, Mark LaNeve , the former U.S. sales chief for GM, said in a conference call Oct. 1. Producer prices are one of three monthly inflation gauges reported by the Labor Department. Prices paid by consumers rose 0.2 percent in September and prices excluding food and energy rose by the same amount, the Labor Department reported Oct. 15. The cost of goods imported into the U.S. rose 0.2 percent last month, the Labor Department said the prior day. Fed Vice Chairman Donald Kohn last week said inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.” The minutes of the policy-making Federal Open Market Committee’s Sept. 22-23 meeting last week showed officials weighed the risks that an anemic recovery would lead to “subdued and potentially declining wage and price inflation.” To contact the reporter on this story: Bob Willis at bwillis@bloomberg.net