U.S. Economy: Producer Prices Fell More Than Forecast

Sept. 18 (Bloomberg) -- Prices paid to U.S. producers fell more than forecast in August, diminishing concern over inflation as the Federal Reserve lowers interest rates.

The 1.4 percent decrease, the biggest since October, followed a 0.6 percent increase in July, the Labor Department said today in Washington. So-called core prices, which exclude fuel and food costs, rose 0.2 percent after a 0.1 percent gain the month before.

Slower inflation gave policy makers room to cut their benchmark rate today in an effort to sustain the expansion in the face of a housing recession. A drop in fuel expenses pushed prices down in August and cooling economic growth will continue to restrain raw-material costs, economists said.

The Fed ``can point to reasonably good news on inflation,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York, who accurately forecast the core rate. ``The weakness in the economy is making it difficult for companies to pass along increases. That bodes very well'' for inflation in coming months, he said.

The producer-price report is the second of three monthly inflation gauges. The government said on Sept. 14 that import prices dropped 0.3 percent in August, the first decline in seven months. Figures for consumer prices will be issued tomorrow.

``There is little residual inflation pressure in the U.S. economy,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

More Foreclosures

A private survey by RealtyTrac Inc. showed the number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier as subprime borrowers with adjustable-rate mortgages saw their monthly payments rise.

Confidence among homebuilders tied a record low in September as increased lending restrictions and higher borrowing costs concerned buyers, a report from the National Association of Home Builders/Wells Fargo said. The index of builder sentiment dropped to 20, matching the January 1991 reading as the weakest ever, the Washington-based association said today.

The drop in producer prices last month was led by a 6.6 percent decline in energy costs that was the biggest since April 2003. Costs for gasoline, natural gas, heating oil and diesel fuel all fell.

The Fed cut the federal funds rate by a greater-than- forecast half point to 4.75 percent today in a unanimous decision. The Federal Open Market Committee's statement said ``developments in financial markets since the Committee's Last regular meeting have increased the uncertainty surrounding the economic outlook.''

Yields Rise

After the Fed decision, the benchmark 10-year U.S. Treasury note yielded 4.51 percent at 2:20 p.m. in New York, up from 4.47 percent late yesterday. The note was little changed in the hours after the price report.

Economists had forecast producer prices would decline 0.3 percent after a 0.6 percent increase, according to the median of 76 projections in a Bloomberg News survey. Core prices were expected to rise 0.1 percent.

Over the past 12 months, producer prices rose 2.2 percent, down from a 4 percent increase in July. The year-over-year increase in costs excluding food and energy also eased to 2.2 percent compared with 2.3 percent in July.

A separate report from the Treasury Department showed foreign buying of U.S. securities slowed in July to the weakest pace in seven months as a rout in the subprime mortgage market sapped demand for American bonds. Total holdings of equities, notes and bonds rose a net $19.2 billion, from a revised $97.3 billion in June.

Fed Policy

Economists almost universally forecast the Fed will cut the benchmark overnight lending rate between banks for the first time since 2003. The median calls for a quarter-point cut to 5 percent.

Costs of intermediate goods, such as steel used in earlier stages of production, fell 1.2 percent in August, after a 0.6 percent increase the prior month, today's price report showed. They were up 2.4 percent from a year ago.

Excluding food and energy, intermediate prices fell 0.5 percent and were up 2.4 percent from August 2006.

Prices for raw materials, or so-called crude goods, dropped 3 percent.

The cost of consumer goods fell 1.8 percent as food charges fell and prices for capital goods rose 0.1 percent.

Commodity Costs

Faced with the prospect of an economic slowdown, some companies are lowering prices to stoke demand ahead of the key holiday-spending season in the last three months of the year. Apple Inc. Chief Executive Officer Steve Jobs earlier this month cut the price of the iPhone by $200 to boost sales. The calendar fourth quarter and the back-to-school season that just ended are Apple's two busiest periods.

Others are suffering from increases in commodity costs and are boosting prices as a result.

``We've already raised prices and have more planned,'' Sara Lee Corp. Chief Executive Officer Brenda Barnes told analysts last week. ``We are certainly facing these headwinds of increased commodity costs, some of them at unprecedented levels, like wheat.''

Sara Lee fell $10 million short of covering the jump in raw-material costs, even after raising prices on bread and coffee, Barnes said.