Wholesale inflation rises; labor market struggles

WASHINGTON (Reuters) - Producer prices rose by the most in three years in August as energy costs surged, but underlying inflation pressures remained contained, keeping the door open to a further easing of monetary policy.

Other data on Thursday underscored the weakness in the labor market, a major concern for the Federal Reserve, with the number of Americans filing new claims for state unemployment benefits touching a two-month high, although some of the gain was attributed to Tropical Storm Isaac.

The reports came as officials from the central bank debated whether to launch another controversial round of bond purchases to push borrowing costs lower in an effort to spur a stronger recovery.

Economists said the strong rise in wholesale inflation was unlikely to translate into a sustained increase in prices at the supermarket and shopping mall, which would be troubling for the Fed.

"There is little indication that it's going to pass through to higher consumer inflation," said Gus Faucher, a senior economist at PNC Financial Services Group in Pittsburgh. "I don't think that if the Fed is looking to ease that this would stop them. We continue to have economic growth that is modest."

The Fed is expected to announce the launch of a third round of bond purchases at the end of its two-day meeting on Thursday. Its decision, which could also include tweaks to its pledge to hold rates near zero at least through late-2014, is expected around 12:30 p.m. EDT (1630 GMT)

The Labor Department said its seasonally adjusted producer price index increased 1.7 percent last month, the largest gain since June 2009, after rising 0.3 percent in July.

The increase in prices received by farms, factories and refineries overshot economists' expectations for a 1.1 percent advance. Energy prices, which surged by the most in three years, accounted for more than 80 percent of the rise in wholesale inflation.

A second report from the department showed initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 382,000 last week, exceeding expectations for an increase to 370,000.

The department said Tropical Storm Isaac, which drenched parts of the country, accounted for about 9,000 of the first-time claims filed last week. The number is not adjusted to take normal seasonal patterns into consideration.

Stocks on Wall Street were little changed as investors awaited the Fed's decision. Prices for U.S. government debt rose, while the dollar was largely steady against a basket of currencies.

SLUGGISH LABOR MARKET

Even accounting for the storm, the claims report suggested little improvement in the labor market after job growth slowed sharply in August. The four-week moving average for new claims, a better measure of labor market trends, climbed 3,250 to 375,000, the highest since the middle of July.

Employers added just 96,000 jobs last month, a step down from July's 141,000 count. While the unemployment rate dropped to 8.1 percent in August from 8.3 percent, it was because Americans gave up the search for work.

The sluggish labor market, which is restraining domestic demand, suggests any rise in consumer prices stemming from the spike in producer inflation last month could be temporary, although it will put a squeeze on households.

"This report does not bode well for households who are dealing with inflation-adjusted incomes that are going nowhere," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

The department will release its consumer price index on Friday. Consumer prices are forecast to have increased 0.5 percent last month after being flat in July, according to a Reuters survey. On a year-on-year basis, they are seen up 1.7 percent, below the Fed's 2 percent target but an acceleration from 1.4 percent in July.

At the wholesale level, energy prices jumped 6.4 percent last month, with gasoline costs surging 13.6 percent.

Food prices rose 0.9 percent, the largest gain since November. Prices for dairy products, which rose by the most since June last year, accounted for a third of the increase in food prices last month.

Food prices had increased 0.5 percent the prior month and could remain elevated as a severe drought pushes up the cost of grain and soybeans.

"Unfortunately, this is only the beginning of the drought impacts," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

(Editing by Andrea Ricci)

Source: http://news.yahoo.com/tropical-storm-issac-boosts-jobless-claims-last-week-123348999--business.html

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