Energy prices may soon stabilize say analysts

The latest Producer Price Index (PPI) shows that inflation remained in stand-still mode in August as an upsurge in food prices was offset by an equivalent decrease in energy prices.

“It’s a good-news, bad-news scenario,” said IHS Global Insight U.S. Economist Gregory Daco. “For shippers, it means getting a little break on fuel expenses.”

Food prices rose 1.1 percent boosted by higher meat prices, while energy prices fell 1.0 percent on lower petroleum, liquefied gas, gasoline and diesel prices. Core PPI inflation was up for the ninth consecutive month, gaining 0.1 percent. However, the year-over-year rate of increase is showing some tentative signs of plateauing.

Consumer goods prices were flat for the month – good news for households – but still 8.2 percent above last year – not so good news. IHS Global Insight expects these prices to edge down in the coming months as weaker demand puts downward pressure on prices. Capital equipment prices inched lower on weaker computer prices.

Overall, weaker economic growth domestically and abroad should continue to put downward pressure on most categories of producer prices with the exception of food prices (more susceptible to weather conditions). In an environment where producers have been squeezed by higher input costs (mostly from energy and food prices), the news of potential future declines in wholesale prices will be welcomed. But, it is uncertain whether battered businesses will want to reduce consumer prices as a result.

IHS Global Insight sees lower producer prices and well-anchored wages as signs that inflation should moderate in the coming months. If incoming economic data remains on the down side, this should push the Federal Reserve towards more monetary stimulus (but, probably not during the next FOMC meeting of September 20-21).