Producer Prices Ease on Drop in Oil, Food; Core Up

U.S. producer prices fell in December as companies paid less for gasoline and vegetables, although higher prices for light motor trucks pushed a measure of underlying inflation higher.

Headline PPI actually fell 0.1 percent for the month, but the core, which strips out volatile food and energy prices, rose 0.3 percent, the most since July 2011.

"The real surprise here was that the core was up, it was firmer than expected but that was driven by a couple of outliers, including prescription drugs," said Jacob Quibina, senior US economist at RBC Capital Markets in New York. "Overall the report is still relatively benign in terms of inflation."

The report comes ahead of Thursday's reading on consumer prices , which are expected to show a tame increase of about 0.1 percent.

Inflation pressures are imortant as the Federal Reserve weighs its next steps regarding monetary policy.

The producer price index measures price changes before they reach consumers, declined 0.1 percent in December. That follows a 0.3 percent rise the previous month and is the first drop since October.

Excluding volatile food and energy costs, so-called core wholesale prices rose 0.3 percent. It was the largest increase in five months. Higher prices for pickup trucks, cars, and pharmaceuticals drove the increase.

Still, wholesale prices are trending lower. They increased 4.8 percent in December compared to the same month a year ago. That's the slowest annual increase since January and down from a recent peak of 7.1 percent in July.

Lower wholesale costs mean manufacturers and retailers don't face as much pressure to raise prices for consumers in order to maintain profits. That could keep consumer price inflation in check.

Low also inflation allows the Federal Reserve with more leeway to keep interest rates low and take other steps to boost the economy.

The Fed projects consumer price inflation will fall from about 2.8 percent in 2011 to roughly 1.7 percent this year. That's in the Fed's preferred range for core inflation of about 1.7 percent to 2 percent.

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

Wholesale price inflation peaked last year and most economists expect that it will continue to moderate. The prices of oil and agricultural commodities such as cotton and corn have fallen after spiking in early 2011.

The decline in commodity prices pushed down gas prices and enabled retailers to offer discounts on many goods. That helped oost consumer spending, which makes up 70 percent of economic activity.

Consumer spending likely grew at the fastest pace in a year in the final three months of 2011. Some economists estimate that it rose at a 3 percent annual pace in the October-December quarter, up from a 1.7 percent rate in the third quarter.

As a result, overall growth may top 3 percent in the fourth quarter. That would be an improvement from the 1.8 percent annual pace in the July-September quarter and 0.9 percent in the first six months of the year.