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 The Labor Department said on Friday its producer price index for
final demand declined 0.5 percent as profit margins in the services
sector, especially gasoline stations, were squeezed, and
transportation and warehousing costs fell.
"The underlying message appears to be that pipeline inflationary
pressures remain quite weak, even as energy prices have stabilized
and gasoline prices have drifted modestly higher," said Millan
Mulraine, deputy chief economist at TD Securities in New York.
The PPI had dropped 0.8 percent in January. In the 12 months through
February, producer prices fell 0.6 percent, the first decline since
the series was revamped in 2009.
Economists had forecast the PPI rising 0.3 percent last month and
remaining unchanged from a year ago.
Prices for U.S. government debt gained marginally on the inflation
data. U.S. stock indexes fell sharply, as a strong dollar threatened
to erode the profits of multinational companies and tumbling crude
prices pressured energy firms including Chevron Corp and Noble Corp.
While the weak inflation backdrop would normally be associated with
a struggling economy, there appears to be little reason to worry
given the fairly robust labor market.
"We would not take the producer prices report as a sign that the
economy is secretly rotten if you pull back the tarp and take a look
at the hull. The economy is creating millions of jobs," said Chris
Rupkey, chief financial economist at MUFG Union Bank in New York.
A separate report from the University of Michigan showed its
consumer sentiment index fell 4.2 points to 91.2 in early March.
Lower-income and middle-income households said harsh winter weather
had left them with high utility bills and disrupted shopping and
general business activity.
Bad weather and a now-settled labor dispute at ports on the West
Coast undercut economic activity early in the year.
First-quarter GDP growth estimates range as low as a 1.2 percent
annual rate and as high as a 2.2 percent rate. The economy expanded
at a 2.2 percent rate in the fourth quarter.
JUNE HIKE STILL IN PLAY
The inflation data came ahead of next week's Fed meeting, where
policymakers are widely expected to signal the U.S. central bank's
openness to a June rate hike by dropping a pledge to be "patient" in
considering such a move because of labor market strength.
With price pressures remaining muted and retail sales extending
their decline in February, the Fed could delay the move until
September.
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"The Fed is probably going to hike even if inflation stays low,
whether it's June or September, because they are confident about the
strong labor market conditions ultimately leading to higher
inflation," said Michelle Girard, chief economist at RBS in
Stamford, Connecticut.
The Fed, which has a 2 percent inflation target, has kept its key
short-term interest rate near zero since December 2008.
Services accounted for 70 percent of the decline in the PPI last
month. The volatile trade services component, which mostly reflects
profit margins at retailers and wholesaler, fell a record 1.5
percent in February.
It was pulled down by a 13.4 percent drop in margins at gasoline
service stations, reflecting a recent plunge in prices at the pump.
Profit margins also fell for apparel, footwear and jewelry
retailers, as well as for food and alcohol.
There also were declines in machinery, equipment, parts and supplies
wholesale margins, signs that a strong dollar - it has appreciated
more than 17 percent since July on a trade-weighted basis - was
helping to keep a lid on inflation.
A 1.5 percent drop in transportation and warehousing services also
weighed on producer prices last month. Energy prices, which had been
a drag on producer inflation in recent months, were unchanged in
February.
A key measure of underlying producer price pressures that excludes
food, energy and trade services was unchanged after a record 0.3
percent drop in January.
"It suggests that the stronger dollar and second-round effects from
the decline in energy are still suppressing pipeline inflation,"
said Blerina Uruci, an economist at Barclays in New York.
(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione
in New York; Editing by Paul Simao)
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