US producer prices surge while retail dips

WASHINGTON - US producer prices rose in October as soaring home heating costs offset cheaper petrol, while retail sales suffered less than feared from a drop in car buying thanks to brisk demand for other goods.

The Labor Department said prices received by farms, factories and refineries rose 0.7 per cent last month, defying Wall Street forecasts for a flat reading after September's roaring 1.9 per cent gain.

Outside the volatile food and energy sectors, however, so-called core producer prices fell a surprise 0.3 per cent in October despite economist forecasts for a 0.2 per cent rise.

Economists said the price numbers should reassure the Fed that inflation is not about to pick up sharply, although the data likely won't be enough to prompt the cental bank to pause in its gradual course of interest rates rises.

Consumer price data are due tomorrow.

"The report simply does not point to any immediate sharp rise in inflation," said Joel Naroff of Naroff Economic Advisors.

"That has to make the Fed members feel good, though I doubt they will get wild and crazy and actually start considering stopping their rate hike programme."

Chicago Fed Bank President Michael Moskow today signaled more interest rate hikes are likely, saying such a policy was "appropriate" to hold down inflation.

A separate report from the Commerce Department showed retail sales dipped a smaller-than-expected 0.1 per cent in October. Car sales were weak, but the pace of buying was strong outside auto showrooms and petrol stations.

Analysts had forecast October sales would fall 0.7 per cent on motor vehicle and parts weakness. Car sales did fall sharply -- shedding 3.6 per cent in the month -- but retail sales excluding autos rose a robust 0.9 per cent.

Economist Sherry Cooper of BMO Nesbitt Burns said the report, along with recent anecdotal evidence, indicate "the coming holiday season will be rosier than earlier expected."

Still, Target Corp said November sales at stores open at least a year would come in below earlier forecasts, dampening optimism for holiday spending.

Wal-Mart Stores Inc, the world's largest retailer, offered a contrasting dose of cheer, saying it expected a good holiday season and was already seeing strong demand in key categories including electronics, toys and apparel.

According the Commerce Department report, clothing was in hot demand in October. Apparel and accessory store sales jumped 3.1 per cent, the largest increase since October 2002.

A pair of reports on chain store sales showed weekly sales on track going into the holiday shopping season.

The International Council of Shopping Centres and UBS said sales rose 3.9 per cent last week compared to last year, while Redbook Research found sales at major retailers up 3.5 per cent over the same period.

US Treasury debt prices held early gains, with the tamer-than-expected core inflation offsetting the healthy retail sales data.

They got further traction when Ben Bernanke, President George W. Bush's pick to replace Alan Greenspan as chairman of the Fed, vowed at his Senate Banking Committee confirmation hearing to stay tough on inflation.

The New York Federal Reserve said business conditions at New York state factories improved in November with higher employment and record high prices paid.

The New York Fed's Empire State index showed overall conditions for manufacturers rose to +22.82 from +12.08 in October, which was the weakest level in five months.

Wall Street had expected a weaker +15.00 reading in the survey, where the zero level delineates growth from contraction. The survey's employment index also rose to its highest level in over a year.

"It was a pretty broad-based improvement," said Patrick Fearon, senior economist at A.G. Edwards & Sons.

The report on producer prices showed a big drop in automobile prices helped depress core inflation in October. Passenger car prices fell 3 per cent, their largest decline in four years, and light motor trucks dropped 2.2 per cent.

While petrol prices fell 3.3 per cent last month as the market impact of Gulf Coast hurricanes Katrina and Rita waned, the largest residential natural gas increase in more than two years pushed overall energy prices up 4.1 per cent. Residential natural gas prices rose 12.7 per cent in October, while home heating oil costs climbed 12.3 per cent.

The 12-month increase in producer prices was 5.9 per cent, largely due to a 26.1 per cent increase in the cost of finished energy goods.

Commerce Department officials said they were not able to estimate how much Hurricane Katrina affected retail sales data, but noted the regions hit by the Gulf Coast storms account for a minimal portion of national retail business.

October gas station sales were down 0.8 per cent, the largest drop since December 2004. Retail sales excluding motor vehicles and petrol grew 1.1 per cent after rising 0.8 per cent the previous month.

- REUTERS