Wholesale prices plunge in August, but so do retail sales

The sharp retreat in the producer price index will be welcome news at the Federal Reserve, which has been worried that it might have to start raising interest rates if inflation pressures did not start to moderate.

Fed officials are expected to keep their interest rate targets unchanged when they meet Tuesday and, if inflation continues to retreat, they will likely hold rates steady the rest of this year.

If the Fed had been forced to start raising interest rates, that would have presented another problem for an economy facing a host of headwinds from rising unemployment, a prolonged housing recession, a severe credit crunch and a troubled financial system.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence jumped to 73.1 in September— the highest since January — from 63.0 in August, the biggest monthly jump since January 2004.

September's reading was well above economists' median expectation of 64.0, according to a Reuters poll.

Consumers' sunnier mood can be traced mostly to lower prices at the gas pump, according to the survey, whose reading on one-year inflation expectations plunged to 3.6%, matching February's low, from 4.8% last month.

According to the survey, only two extraordinary events in the past quarter century have prompted such a steep one-month decline in inflation expectations: Hurricane Katrina in 2005 and the Sept. 11, 2001 attacks on the United States.

"Lower inflation eased pressures on the financial situation of consumers and prompted them to hold a more optimistic outlook for the economy," said survey director Richard Curtain.

However, consumers still see inflation rising at a faster clip than they did a year ago, when the one-year inflation outlook stood at 3.1%.

The report's five-year inflation expectation fell more modestly to 2.9% from 3.2% in August.

  • 1
  • |
  • 2
Join the Discussion
blog comments powered by Disqus
You Might Also Like...