US producer prices fell by a much larger-than-expected 1.4 percent in August as energy prices slumped, government data showed on Tuesday, giving the Federal Reserve good news as it weighs an interest rate cut.
It was the largest fall in producer prices since a 1.5 percent dip in October 2006, while the 6.6 percent drop in finished energy goods prices last month was the sharpest since April 2003's 8.0 percent drop, the Labour Department said.
Oil prices have since rebounded and US crude oil notched a fresh record on Tuesday of $81.24 a barrel, sending a warning that inflation is still at risk from energy prices, but analysts focused on the headline producer price decline.
"While the market will undoubtedly take this as confirmation that the Fed will ease ahead of the (Fed) announcement later today, the better news inside the data is that pricing in the pipeline eases noticeably," Joseph Brusuelas, chief economist at IDEAglobal, said in a note.
Producer prices were released as Federal Reserve policy-makers gathered to consider a cut in interest rates to ward off the impact of a credit crunch, stemming from problems in the subprime mortgage market, on the wider economy.
"The PPI supports the view that inflation is less of a threat and that the Fed can cut interest rates in order to help the housing market," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis.
US Treasury market data separately showed that foreign enthusiasm for US debt may have been ebbing even before the full extent of the subprime woes surfaced last month. Foreign investors bought a net $19.2 billion in long-term US securities in July, the lowest in seven months.
A closely watched quarterly earnings report from investment bank Lehman Brothers Holdings confirmed that the meltdown in the subprime mortgage market and subsequent credit squeeze were hurting profits at US securities firms.
Still, the 3.2 percent drop in Lehman's earnings from the year before was not as steep as Wall Street had expected and for the moment allayed investors' worst fears.
Bond prices edged lower after the Lehman report. US equities opened higher, major stock indexes in Europe extended gains and the dollar pushed ahead as investors mulled Lehman's earnings and the inflation data. Policy-makers had been more worried about inflation than economic growth last month, before credit woes roiled stock markets around the world.
Economists polled by Reuters had expected producer prices - a gauge of the prices paid at the farm and factory gate - to fall 0.2 percent last month after an unrevised 0.6 percent gain in July. Stripping out volatile food and energy costs, producer prices rose 0.2 percent in August following an unrevised 0.1 percent increase in July. Economists had forecast a rise of 0.1 percent last month.
Core prices were unaffected by changes in the price of cars and trucks, a Labour Department official said, since car prices rose 0.5 percent in August while light truck prices fell 0.9 percent, broadly cancelling each other out. Both core and overall producer prices rose 2.2 percent in August on a year-on-year basis.
Other data on Tuesday also signalled weakness in the wider economy. Research firm RealtyTrac said US home foreclosure filings rose 36 percent in August to 243,947, the highest since it began its monthly report in January 2005 and 115 percent above the year-ago level.
That translates into one foreclosure filing in August for every 510 households, also a high for the RealtyTrac report. "The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now," James Saccacio, RealtyTrac's chief executive, said in statement.
Another report from the International Council of Shopping Centers and UBS Securities showed US chain stores sales fell 1.1 percent last week. The year-on-year gain, however, held at 2.9 percent, the same as in the prior week. Data from Johnson Redbook also showed retail sales rising year on year.
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