Producer prices, trade deficit show declines

Cars, gasoline less costly

faster expansion signaled

September 11, 2004|By BLOOMBERG NEWS

WASHINGTON - U.S. producer prices unexpectedly fell last month and the trade deficit narrowed in July, showing that inflation remains tame as economic growth accelerates.

The 0.1 percent decrease in the measure of prices paid to factories, farmers and other producers followed a 0.1 percent rise in July, the Labor Department said yesterday. The rate, excluding food and energy, also fell 0.1 percent last month for the first drop since February.

The trade gap shrank to $50.1 billion, trailing only the $55 billion shortfall in June.

Cheaper cars and gasoline helped keep inflation down, and the narrowing trade gap, due partly to lower oil imports and the second-highest exports on record, may be less of a drag on growth this quarter. The results may give the Federal Reserve more flexibility to hold off on an increase in its benchmark interest rate, and investors pushed down Treasury bond yields.

"This lets the Fed continue raising rates at a moderate pace," said Richard Yamarone, chief economist at Argus Research Corp. in New York. "In the event that economic growth decelerates, they have the luxury" of slowing the pace of rate increases, he said.

The Fed is forecast to raise the benchmark overnight bank-lending rate by a quarter-point Sept. 21 to 1.75 percent, the third increase since June.

Economists had forecast a 0.2 percent rise in the price index. The trade deficit was forecast to narrow to $51.5 billion.

Federal Reserve Chairman Alan Greenspan said in congressional testimony this week that oil prices aren't causing inflation to accelerate and that the economy has strengthened.

The economy is forecast to expand at a 3.7 percent annual rate this quarter and at a 4 percent pace in the final three months of the year.

Energy prices rose 0.2 percent last month after a rise of 2.3 percent in July. Higher heating oil and natural gas costs were restrained by a 5 percent decline in the price of gasoline.

The costs of partially finished goods increased 1 percent after rising 0.8 percent. Excluding food and energy, prices of raw materials rose 4.5 percent after an 8.6 percent jump in July.

"Inflation pressures at earlier stages of production processing continue to build," said David Resler, chief economist at Nomura Securities International in New York. "However, the moderation in finished-goods prices suggests continued problems in passing through rising costs."

So far this year, producer prices are rising at a 3.8 percent annual rate compared with a 4.6 percent increase at this time last year. Core prices are increasing at a 1.8 percent annual pace, compared with a 1 percent rate.

Prices for capital equipment fell 0.1 percent after rising 0.1 percent in July. Computer prices declined 1.7 percent last month and are down 11 percent from August last year.

Passenger car prices dropped 1.2 percent in August, the largest since a 2.5 percent decrease in April 2003. Costs of light trucks also fell 2.5 percent, after no change in July.

Automakers increased the amount spent on incentives last month to $4,203 from $4,027 in July, according to estimates from CNW Market Research, which tracks auto incentives. Incentives rose 5 percent from July at General Motors Corp. to $4,869, 0.8 percent at Ford Motor Co. to $4,911, and 4.5 percent at DaimlerChrysler AG's Chrysler unit to $4,851, CNW said.

Food prices fell 0.2 percent after a decline of 1.6 percent a month earlier, the Labor Department said.

The Commerce Department's report showed exports rose to $95.9 billion in July, second only to May's record and led by vehicles and business equipment. Imports declined to $146 billion.

Meanwhile, the U.S. trade deficit through July totaled $339 billion, compared with $289.6 billion in the first seven months of 2003. The deficit for all of last year was a record $496.5 billion.

The value of U.S. oil imports fell in July to $10.6 billion from $11.7 billion the month before. The price of oil was $33.28 a barrel, down from $33.76 in June. The volume of oil fell to 318.8 million barrels from 346.5 million.

The trade gap with China grew to $14.9 billion, the widest ever, and the deficit with Japan widened to $6.4 billion from $6.3 billion. The gap with Canada, the largest U.S. trading partner, narrowed to $6.1 billion from $6.6 billion.

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