Inflation at wholesale level remains low in August

DANIEL WAGNER - AP Business Writer
In this Sept. 8, 2010 photo, a Costco butcher puts out beef at Costco in Mountain View, Calif. Wholesale prices rose last month for the second straight month as the cost of energy climbed enough to offset an unexpected drop in food prices. (AP Photo/Paul Sakuma)
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In this Sept. 8, 2010 photo, a Costco butcher puts out beef at Costco in Mountain View, Calif. Wholesale prices rose last month for the second straight month as the cost of energy climbed enough to offset an unexpected drop in food prices.

Wholesale prices rose last month, but outside of volatile food and energy costs inflation remained tame.

The Producer Price Index rose 0.4 percent in August after increasing 0.2 percent in July, the Labor Department said Thursday. The index measures price changes on products before they reach the consumer.

But excluding food and energy costs, so-called "core" producer prices were relatively flat. They rose just 0.1 percent and are up 1.3 percent in the past year.

There has been little threat of inflation in recent quarters. The weak economy has stifled demand at every stage of the production chain. That makes it tough for producers to raise the prices they charge to retailers.

Concerns about deflation grew this spring after prices declined for three straight months. July's increase quieted most of those fears. Economists said Thursday's report confirmed that deflation is not an immediate threat.

Energy costs increased by the most since January. Gasoline costs rose 7.5 percent. Home heating oil costs increased 7.0 percent.

Those increases followed four straight monthly declines in energy prices, during which prices fell a combined 13.5 percent. The August results are a partial rebound from that decline.

Food prices fell 0.3 percent, mostly because of a decline in the cost of vegetables. Irish potatoes were the outlier. Their prices rose 27.2 percent — the most since June 2008.

However, price increases are expected in the months to come as many raw materials were way up. Wheat prices rose 20.5 percent, after a drought and fires in Russia wiped out one-third of that country's crop. Corn prices increased 11.2 percent in August. And the costs of raw aluminum and copper rose 11.7 percent and 9.5 percent, respectively.

Sam Bullard, senior economist with Wells Fargo Securities, said the price increases are a result of growing demand from emerging markets overseas. As those economies recover more quickly than the U.S. economy, they are bidding up prices for the materials. That could hurt the profits of U.S. companies that rely on such commodities.

"This is a substantial hit, and you can't pass it along" to consumers, Bullard said. High unemployment and economic uncertainty have led people to spend less and save more. Demand is too weak for companies to raise prices.

Bullard said material costs should keep rising in the coming months, "and until they're able to pass on those prices to customers, profit margins will continue to get squeezed."

Still, the weak consumer demand means there's no threat of inflation, Bullard said.

On Friday the Labor Department reports on the state of consumer prices in August, which are expected to rise by a small amount.