Lower energy costs weigh on U.S. producer prices

USA consumer prices recorded their biggest drop in eight months in September as the cost of gasoline fell, but a steady pick-up in underlying price pressures should allay fears that a disinflationary trend was reasserting itself.

The US Bureau of Labor Statistics reported the CPI dropped 0.2% month-on-month in September, in line with analysts’ predictions. Gasoline costs fell a sharp 16.6 percent, while food prices slid 0.8 percent.

Core prices, which exclude volatile food and energy items, picked up 0.2%, Economists expected a 0.1% rise.

Economic slowdowns in China and commodity-exporting emerging markets, combined with the anticipation of a Fed interest rate increase have also made the USA dollar stronger, which makes imports cheaper.

All of this suggests that the Federal Reserve may continue to delay an interest rate increase until signs of inflation appear. On a year-over-year basis, the headline CPI is now flat against the gain of 0.2% in August’s annualized comparison.

Another Labor Department report showed the number of Americans filling applications for jobless benefits last week matched the lowest in four decades.

The index measures prices from the perspective of the seller but generally tracks closely with other measures of inflation for consumers. Food prices rose 0.4%, however. The main reason is low gas prices, which are keeping inflation in check.

Non-tradables inflation, which covers domestic goods and services, was zero in the quarter, after rising 0.1 percent in June and the lowest level since March 2001. It has been below the 2 percent midpoint of the central bank’s target band since late 2011.

“Although the case for a December hike took a hit… this more-interesting-than-usual core CPI figure will give the hawks something to talk about”, said Jennifer Lee, an economist at BMO Capital Markets in Toronto.

But other Fed officials are increasingly raising doubts about that projection. Fed Chair Janet Yellen has said she expects it will be appropriate to raise rates before the end of this year, provided the economy grows as the central bank predicts.