Energy costs absorbed, economists say

Competitive pressure is keeping inflation at bay

wholesale prices steady


Most businesses seem to be absorbing higher energy costs in an effort to keep prices down and stay competitive, economists said yesterday after the latest economic report showed few signs of inflation.

The report on the producer price index, which is considered an early indicator of inflation, showed that wholesale prices were unchanged in June. After Thursday's report on consumer prices, which were flat in the month, the price index offered another indication that inflation had been kept in check in June.

Other reports yesterday showed that consumer confidence in July touched its highest level in 2005 and industrial production grew at its fastest pace in more than a year.

The core producer price index, which excludes food and energy prices, fell 0.1 percent in June, the Department of Labor reported. Analysts had expected a 0.1 percent rise in the core rate and a 0.4 percent increase in the overall number.

Energy prices rose 2 percent and food prices fell 1.1 percent. So far, companies have offset higher energy costs by cutting other costs or increasing productivity. "If you are a company that is very energy-intensive, you have probably been able to pass the costs along," said Stephen Stanley, chief economist at RBS Greenwich Capital. "If you look at airfare and shipping, costs have gone up. But for the most part, firms have had to absorb the cost."

The producer price index rose 3.6 percent and its core rate rose 2.2 percent, compared with June 2004.

Like other economic statistics released in the last two weeks, the producer price data pointed to a sustained economic expansion.

"This is a pretty consistent story," said James O'Sullivan, an economist at UBS. "In two weeks' time, we are going to get GDP," he said, referring to the report on the nation's gross domestic product, "and it's probably about 4 percent growth, which is pretty strong."

Americans appear to agree that the economy is improving. The University of Michigan consumer confidence index rose to 96.5 in July, up from 96 in June. It was a surprisingly strong showing considering the London terrorist bombings and perpetually rising gasoline prices.

Industrial production rose 0.9 percent in June from May, more than twice the 0.4 percent analysts were expecting and its fastest pace since February 2004.

Automakers increased production by 2.8 percent in June, after raising it 1.1 percent in May and lowering it more than 2 percent each in April and May. Electricity production was up 6.9 percent in June, after a 1.2 percent decline in May.

Inventories rose a modest 0.1 percent, according to a Commerce Department report also released yesterday. That indicates companies are having some success in clearing their warehouses.

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