U.S. Producer Prices Rose in June as Gasoline Surged

July 14 (Bloomberg) -- Prices paid to U.S. producers rose in June by twice as much as anticipated, led by surging gasoline costs.

The 1.8 percent increase in prices paid to factories, farmers and other producers followed a 0.2 percent gain in May, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices rose 0.5 percent.

Tepid consumer spending and business investment are forcing companies to boost incentives or keep a lid on prices in order to move merchandise. A surge in energy costs in recent months is abating in the current month, indicating inflation may subside in coming months.

“Sharply higher gasoline prices are the primary culprit behind the jump in the headline number,” Tom Porcelli, a senior economist at RBC Capital Markets in New York, said before the report. For other items, he said, “the risk is skewed toward prices remaining soft over the near term.”

Economists forecast producer prices would rise 0.9 percent, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from no change to a 1.8 percent gain.

Compared with a year earlier, companies paid 4.6 percent less for goods.

Core costs were projected to rise 0.1 percent from a month earlier after a 0.1 percent decline in May, according to the Bloomberg survey.

Energy Costs

A 6.6 percent increase in the cost of energy led to the increase in wholesale prices. Gasoline soared 18.5 percent and home heating oil rose 15.4 percent. These costs may fall in July. The price of crude oil futures closed yesterday at $59.69 a barrel on the New York Mercantile Exchange, compared with $72.68 on June 11.

The gain in prices excluding food and fuel was led by increases in the cost of light-motor trucks, furniture fixtures and pharmaceuticals.

Passenger-car costs rose 2 percent, the biggest gain since September 2006, after a 0.1 percent increase a month earlier. Car prices are likely to be restrained as automakers boost discounts to sell unwanted inventory.

The cost of food gained 1.1 percent as prices for vegetables increased by 22 percent.

A Commerce Department report today showed sales at U.S. retailers rose in June, helped by incentives on autos and higher gasoline prices boosted service-station receipts. The 0.6 percent increase was larger than forecast and the biggest gain since January, the report said. Purchases excluding automobiles and gasoline dropped for a fourth consecutive month.

Inflation Signs

Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. rose 3.2 percent is June as petroleum costs increased the most in a decade, the government said last week. Labor may say tomorrow that consumer prices increased 0.6 percent in June after rising 0.1 percent the prior month, economists forecast.

Federal Reserve Bank of Chicago President Charles Evans last week said forecasting inflation is “particularly difficult,” adding there are risks for both inflation and falling prices.

“In the near term, I think the downward forces on inflation will be greater than the upward forces,” Evans said in a July 10 speech in South Bend, Indiana.

The economy has lost 6.5 million jobs since the recession started in December 2007, the worst of any downturn since World War II, and gross domestic product contracted at a 5.5 percent annual rate in the first quarter, the third consecutive drop.

Second-Half GDP

Growth will average 1.5 percent in the July-to-December period after another contraction in the second quarter, according to the median of 57 forecasts in a Bloomberg survey taken from July 2 to July 8. The jobless rate, meanwhile, will exceed 10 percent early next year and average 9.8 percent for 2010, the survey said.

With unemployment rising and the economy still sputtering, companies can’t raise prices and are slow to restart production even as the recession shows signs of easing.

Micron Technology Inc., the biggest U.S. producer of computer-memory chips, on June 25 reported a wider loss after slowing electronics demand and an industry glut kept prices below the cost of production.

Micron’s main product, chips that supply the memory in computers, sold for less than it cost to make after the industry built too many plants and created a glut.

Meanwhile, Alcoa Inc., the largest U.S. aluminum producer, on July 8 reported a second-quarter loss that was smaller than analysts’ estimates after production cuts and workforce reductions helped the company save money.

“Alcoa has the staying power and reduced cost base to withstand the most serious downturn in the history of the aluminum industry,” Chief Executive Officer Klaus Kleinfeld said in the statement.