WASHINGTON – Inflation was limited last month because of falling gasoline and food costs that have lowered the prices that U.S. companies received for their goods and services.
The Labor Department said Wednesday that the producer price index fell 0.1 per cent in September from the previous month. The index measures the cost of goods and services before they reach the consumer.
Wholesale gas prices dropped 2.6 per cent. Food costs fell 0.7 per cent because of lower prices for corn, soybeans and meats. The costs for light trucks and aircraft rose slightly, but broader inflation was held in check.
Excluding the volatile categories of food, energy and retailer and wholesaler profit margins, prices dropped 0.1 per cent.
In the past year, producer prices have risen just 1.6 per cent, slightly below the Federal Reserve’s target.
“This is part of the reason the Federal Reserve has grown cautious and is warning that it doesn’t want to raise rates too soon or too rapidly,” said Diane Swonk, chief economist at Mesirow Financial.
The Fed targets inflation at about 2 per cent to protect against deflation, since falling prices could pull down wages and potentially trigger another recession. At the same time, the Fed tries to prevent excessive inflation that would erode the buying power of consumers and businesses.
Since late 2008, the Fed has held short-term interest rates at near-zero levels. Many analysts expect the Fed to begin raising rates in the middle of 2015, but the exact timing and pace of any increase could largely be influenced by inflation reaching that 2 per cent target.
Inflation has been relatively modest for much of the five-year recovery from the last recession. That’s largely because few workers have received significant pay increases, making it more difficult for businesses to charge higher prices.
In August, a separate measure of consumer prices fell 0.2 per cent in August, as the cost of gasoline, airline tickets and clothing prices all dropped. Over the past 12 months, consumer prices have risen just 1.7 per cent.
An economic slowdown in Europe, China, Japan and elsewhere should further mute inflationary pressures because it’s driving the value of the dollar higher. A stronger dollar often reduces the cost of commodities such as oil that the financial markets price in U.S. currency.
Inflationary pressures have also been contained by the meagre paychecks for most Americans.
Average hourly pay fell a penny to $24.53 in September That’s an increase of less than 2 per cent over the past year, meaning pay is barely matching inflation.