U.S. producer prices excluding the volatile food and energy categories rose more than expected in October as costs for automobiles and prescription drugs climbed, the government said.
The core rate of the producer price index, which excludes food and energy costs, rose 0.3% last month after increasing 0.8% in September. A 1.1% increase in passenger car prices and a 0.8% rise for light trucks accounted for most of the core rate's gain.
Overall, the producer price index unexpectedly fell 0.1%, the first drop since February, as a surge in fuel costs abated. Still the rise in the core rate could attract the attention of Federal Reserve policymakers, who are to meet Tuesday to decide whether a third interest rate increase is needed this year to keep inflation in check.
"We don't have any inflation yet," said Suzanne Rizzo, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, "but it's a bad sign when we see prices of cars and light trucks going up by substantial amounts for two consecutive months and we still see demand holding up very well. It suggests the market is ripe for inflation."
Excluding vehicles, the producer price index fell 0.3% and the core rate rose 0.1%, Labor Department officials said. Passenger car prices, up 0.3% from a year ago, are now more representative of the true state of pricing in the industry, economists said.
Analysts had expected 0.1% increases in both the October producer price index and the core rate. The decline in the overall index was the first since producer prices fell 0.5% in February.
In a separate report, the Labor Department said first-time claims for state unemployment benefits fell by 6,000 last week, to a seasonally adjusted 285,000, after rising to 291,000 the previous week. The four-week average for new claims fell to 286,750, from 287,750. The average has stayed below 300,000 for 16 weeks -- the longest stretch since the end of 1973.
Aside from the rise in vehicle prices and a 1.2% increase for prescription drugs, producer cost increases were relatively tame. The cost of food, energy, and computers all declined during the month.
For the year to date, the producer price index has risen at a 2.9% annual rate, compared with a decline of 0.4% for the first 10 months of 1998, the Labor Department said. The core rate of the producer price index has risen at a 0.9% rate this year, compared with an increase of 1.6% through October 1998.
Producer energy prices fell 1% during October, reflecting declines for gasoline, heating oil, and electric power. Food prices declined 0.7% in October. In September they had risen 1%, the largest gain since January. Last month's decline reflected lower costs for eggs, vegetables, pork, and fish.
Prices of crude goods, which are materials at the earliest stage of the production process, such as lumber, copper, and crude oil, fell 1.6% last month, reflecting lower petroleum costs. Excluding food and energy, prices of crude goods rose 2.4%. Prices of intermediate goods, which are products such as paint and cardboard boxes, rose 0.3% in October, matching September's gain. Excluding food and energy, prices of intermediate goods rose 0.4%.
Though oil companies can pass on higher crude oil costs by raising gasoline prices at the pump, "other companies have had less success" passing along increases to consumers, said Lynn Reaser, chief economist at Bank of America Corp.'s private bank in Jacksonville, Fla.
The October producer price data came after a month in which the index made its biggest jump in nine years. The September producer price index was boosted by tobacco and autos. Prices rose so much in September because automakers introduced their new models a month early.
"Auto prices rose in September because sales were strong and automakers decided they would not need the usual model-yearend discounting," said Christopher Low, an economist at First Tennessee Capital Markets in New York. "As a result we should have seen prices unchanged or down in October. For the first time in years, automakers think they can pass through the cost increases."
Wednesday's data reflected price adjustments for new features and quality enhancements in the new models, the government reported.
The energy component of the producer price index report fell in October as the cost of crude oil declined. The price of crude oil for December delivery on the New York Mercantile Exchange fell to $21.75 a barrel on Oct. 29, from $24.14 on Sept. 30.
Oil prices have started to fall after rising for much of this year. These price rises came after a decision by members of the Organization of Petroleum Exporting Countries, who were seeking to counter a world oil glut, to cut production by four million barrels a day.