Producer prices for finished goods outside of food and energy fell 0.9% in October, led by a big drop in the price of cars and trucks. The overall index posted a 1.6% drop, reflecting another plunge in energy prices. The October data verified what earlier national business activity reports found: More companies are reporting easing cost pressures.The trend should continue. Prices for goods at earlier stages of production also moderated: Core prices for semifinished goods were unchanged from September, and crude materials fell 1.3%. A pileup in business inventories will help to keep a lid on prices, especially in areas such as vehicles, tech equipment, and housing-related goods, all sectors where stockpiles have risen more than desired in recent months. Companies are also seeing a little relief from abroad, with the prices of imported goods (excluding energy) posting their first monthly decline in nearly a year.
The slowdown in producer prices comes at an important time: Rising labor costs are putting increasing pressure on U.S. businesses' profit margins. To be sure, softer prices for supplies and materials will not fully offset higher labor costs, which account for about 75% of all business expenses in the service sector and more than 50% at factories, says Joshua Shapiro, chief U.S. economist at economic consulting firm Maria Fiorini Ramirez Inc.
But cooler prices for goods mean one less worry for businesses--and justification for the Federal Reserve. The trend appears to back up the central bank's forecast that a slower pace of growth in the second half of the year will lead to easing inflation pressures at the consumer level. That would allow the Fed to keep interest rates steady for a while longer. By James Mehring in New York