US producer prices post biggest drop since 2009

[WASHINGTON] US producer prices fell by the most since 2009 in April, leading to the largest annual decline in nearly 4-1/2 years, which could bolster some economists' predictions for a brief period of deflation as the novel coronavirus depresses demand.

The Labor Department said on Wednesday its producer price index for final demand tumbled 1.3 per cent last month, the biggest decline since the series was revamped in December 2009, after slipping 0.2 per cent in March. In the 12 months through April, the PPI decreased 1.2 per cenrt. That was the biggest drop since November 2015 and followed a 0.7 per cent increase in March.

Economists polled by Reuters had forecast the PPI falling 0.5 per cent in April and declining 0.2 per cent on a year-on-year basis.

The report followed data on Tuesday showing consumer prices dropping by the most since the 2007-09 Great Recession, and a measure of underlying inflation posting a record decline. Lockdowns to slow the spread of Covid-19 have weighed on demand, with the economy contracting in the first quarter at its sharpest pace since the final three months of 2008.

Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices, worsening the economic downturn.

Excluding the volatile food, energy and trade services components, producer prices plunged 0.9 per cent in April, the biggest drop since the introduction of the series in September 2013. The so-called core PPI fell 0.2 per cent in March and has now declined for three straight months. In the 12 months through April, the core PPI decreased 0.3 per cent. That was the first 12-month drop in core PPI and followed a 1.0 per cent increase in March.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target. The core PCE price index increased 1.7 per cent year-on-year in March after rising 1.8 per cent in February. April's core PCE price index data will be released at the end of the month.

In April, wholesale energy prices collapsed 19.0 per cent after tumbling 6.7 per cent in March. They were depressed by a 56.6 per cent dive in gasoline prices, the largest decrease since the series began in February 1947. That followed a 16.8 per cent drop in March.

Gasoline accounted for two-thirds of the decrease in the cost of goods last month. Goods prices fell 3.3 per cent in April, the largest decline since the series was revamped in December 2009, after declining 1.0 per cent in the prior month. Wholesale food prices dropped 0.5 per cent last month after being unchanged in March.

The sharp drop in goods prices accounted for more than 80 per cent of the decline in the PPI last month. Core goods prices fell 0.4 per cent in April after gaining 0.2 per cent in March.

The cost of services fell 0.2 per cent last month, reversing March's 0.2 per cent gain. Services were held down by decreases in transportation and warehousing costs. But there was a 1.6 per cent jump in margins for final demand trade services, which measure changes in margins received by wholesalers and retailers.

Margins rose 1.4 per cent in March. The cost of healthcare services was unchanged in April for a second straight month. Portfolio management fees plummeted 12.0 per cent last month after dropping 0.8 per cent in March. Those healthcare and portfolio management costs feed into the core PCE price index.

REUTERS