Key Manufacturing Index Slides; PPI Inflation Tame

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U.S. producer prices recorded their largest drop in three years in April while a reading of manufacturing in New York indicated contraction.

Producer prices slid as gasoline and food costs tumbled, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.

The Labor Department said on Wednesday its seasonally adjusted producer price index fell 0.7 percent last month, the biggest decline since February 2010. Wholesale prices had dropped 0.6 percent in March.

A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries dropping 0.6 percent last month.

In the 12 months through April, wholesale prices were up only 0.6 percent, the smallest increase since July last year. Prices had increased 1.1 percent in March.

Underscoring the tame inflation environment, wholesale prices excluding volatile food and energy costs nudged up 0.1 percent, the smallest increase since November. The so-called core PPI had risen 0.2 percent in each of the previous four months.

In the 12 months through April, core PPI advanced 1.7 percent after rising by the same margin in March.

The report was the latest suggestion that disinflation was starting to creep in against the backdrop of lackluster domestic and global demand.

Consumer inflation was muted in March, with a measure closely watched by the Fed slowing sharply below its 2 percent target over the 12-month period. With little sign of pipeline price pressures, consumer inflation should remain low this year.

That should give the U.S. central bank room to maintain its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and speed up job growth.

In April, wholesale gasoline prices fell 6.0 percent after dropping 6.8 percent the prior month. That drop helped to push wholesale energy prices down 2.5 percent.

Weak energy prices accounted for over 80 percent of the drop in wholesale prices last month.

Producer prices were also dampened by a 0.8 percent decline in food prices, the largest fall since May 2011. Food prices were held down by a collapse in the wholesales prices of strawberries, eggs and fresh and dry vegetables.

Away from food and gasoline, passenger car prices slipped 0.2 percent, while light truck prices dipped 0.1 percent.

New York Manufacturing Down

Activity in New York state's manufacturing sector unexpectedly contracted in May, falling to the lowest level in four months as new orders and employment pulled back, data from the New York Federal Reserve showed on Wednesday.

The New York Fed's "Empire State" general business conditions index fell to minus 1.43 in May from 3.05 in April, thwarting economists' expectations for an increase to 4.

It was the first reading below zero since January, which indicates contraction for the sector.

New orders also fell to their lowest level in four months at minus 1.17 from 2.20, while inventories tumbled to minus 7.95 from minus 4.55.

Employment gauges slowed as the index for the number of employees declined to 5.68 from 6.82 and the average employee workweek index dropped to minus 1.14 from 5.68.

Companies also felt less optimistic about the months to come, with the index of business conditions six months ahead falling to 25.48 from 31.95.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to national factory conditions.