Producer prices unexpectedly fell in February

Decrease in cost of services major factor in decline, analysts say

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WASHINGTON — Producer prices unexpectedly dropped in February, held back by the biggest decrease in the cost of services in almost a year.

The 0.1 percent decrease in the producer-price index followed a 0.2 percent rise the prior month, a Labor Department report showed Friday in Washington. None of the 73 economists surveyed by Bloomberg projected a decrease. Over the past 12 months, wholesale prices rose 0.9 percent, the smallest year-to-year gain since May.

Clothing retailers, airlines and residential real-estate brokers were among service providers using discounts to lure customers as harsh winter weather curbed demand. Weak inflation gives Federal Reserve policymakers meeting next week room to maintain low borrowing costs.

The weakness "could be weather-related as these firms try to clear some inventories," said Sean Incremona, a senior economist at 4cast Inc. in New York, who was among those with the lowest projection. "There could be some near-term hit, but generally the picture is pretty stable. It's a gradual, very gradual step up toward the Fed target over the next couple years."

Consumer confidence unexpectedly dropped in March to a four-month low, another report Friday showed. The Thomson Reuters/University of Michigan preliminary index of sentiment fell to 79.9 this month from 81.6 in February.

Friday's PPI report is the second using a revamped index that encompasses 75 percent of the economy, up from a third of all production for the old gauge, which reflected the costs of goods alone. In its first major overhaul since 1978, PPI now also measures prices received for services, government purchases, exports, and construction.

The median estimate in the Bloomberg survey called for a 0.2 percent increase. Forecasts ranged from gains of 0.1 percent to 0.4 percent.

Wholesale prices excluding food and energy dropped 0.2 percent compared with a projected 0.1 percent advance, according to the survey median. They climbed 0.2 percent the prior month.

The year-to-year advance in total wholesale prices in February was 0.9 percent, down from a 1.2 percent gain in the 12 months to January. Excluding food and energy, the index increased 1.1 percent in the 12 months ended in February, following a 1.3 percent year-to-year gain in January.

The cost of services dropped 0.3 percent in February, the most

since May, reflecting record decreases for clothing and real-estate broker commissions. Airline and train fares also decreased.

Prices for goods climbed 0.4 percent last month and were up 0.6 percent since February 2013.

Wholesale food expenses climbed 0.6 percent in February. Producers such as Springdale, Ariz.-based Tyson Foods Inc. are seeing gains in prices for beef, pork and chicken, which may at least be temporarily supporting producer inflation.

"This is very unusual to see this kind of price increase this early in the season, and has a lot to do about the supply that consumers are concerned about or that customers are concerned about," Chief Financial Officer Dennis Leatherby said at a consumer and retail conference Thursday. "Over time it'll change -- certainly a little bit of economic growth would help."

Energy costs climbed 0.5 percent last month after a 0.3 percent increase in January.

Producer prices related to consumer spending declined 0.2 percent in February after increasing 0.3 percent a month earlier, Friday's report showed. The selling prices received by businesses for goods and services going toward consumption represent about 68 percent of the revamped PPI, which help to provide insight into longer-term changes in the CPI.

The index also will shed light on figures released in the Fed's preferred inflation gauge, the personal consumption expenditures deflator. Health care prices make up the largest share of the core PCE index that excludes volatile food and energy categories.

"If the core PCE deflator trends higher this year, it is likely because medical care prices are accelerating," Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a research note Thursday. The bank's economists calculated that medical care prices in the PPI correlate almost perfectly with the corresponding prices in core PCE over the past six years.