Wholesale prices plunge in August, but so do retail sales

Wholesale inflation plunged in August by the largest amount in nearly two years, reflecting a drop in gasoline and other energy prices, but sales at the nation's retailers also unexpectedly dropped in August as shoppers cut back, further evidence the economy is losing traction.

A third report said that consumer confidence soared unexpectedly to an eight-month high in September as lower fuel prices soothed inflation fears and made Americans more hopeful about the economy.

Finally, the Commerce Department said that businesses' supplies of unsold goods in warehouses and stock rooms rose 1.1% in July. Economists were expecting a 0.5% gain. It marked the biggest increase since July 2004. The increase in inventories came as business sales rose by a smaller-than-expected 0.5% in July, down from a 1.7% rise in June.

The Labor Department said Friday that its producer price index, which measures prices before they reach the consumer, fell 0.9% last month, nearly double the 0.5% decline economists expected. The price moderation followed three months in which wholesale costs shot up at levels exceeding 1% a month as energy costs surged.

The 0.9% drop in wholesale prices, largest one-month decline since October 2006, could show up in lower prices for shoppers eventually. The August report on consumer prices will be released Tuesday.

Even with the August decline, wholesale prices the past 12 months are up 9.6%, second biggest 12-month price change in the past 27 years, exceeded only by a 9.8% jump for the 12 months ended in July.

Core inflation, which excludes energy and food, was also well-behaved in August, edging up just 0.2%, in line with expectations and well below July's 0.7% spike.

The 0.2% rise in prices excluding food and energy left core inflation rising 3.6% over the past 12 months, the highest since a 3.7% increase for the 12 months ending in May.

For August, gasoline prices at the wholesale level fell 3.5%, the sharpest drop since a 4.6% decline in April. The price of natural gas fell 5%, home heating oil costs were down 13.6% and the cost of liquefied petroleum gas fell 19.5%.

Food costs edged up 0.3% in August, matching the July gain. A big 13.2% plunge in the price of fresh vegetables was offset by increases in the cost of pork, eggs and processed fruit and vegetables.

The core inflation figure was helped by declines of 0.3% for the price of new cars and 1.9% for the cost of light trucks, a category where sales have been slumping as energy prices surged this year.

The Commerce Department said retail sales fell 0.3% in August. Economists expected a gain of 0.3%.

And sales in July turned out even weaker than previously thought, dropping a revised 0.5%, worst showing in five months.

Sales at motor vehicle dealers rose 1.9% in August from July — first increase since January — after a 4.3% July drop. But August sales still were down 13.5% from a year earlier.

Excluding motor vehicles, retail sales in August were down 0.7% after gaining 0.3% in July.

Gasoline sales fell 2.5% last month — biggest monthly decline since mid-2007 — after a 0.2% rise in July. Gasoline prices eased in August from record July levels.

Sales of building materials, clothing and electronics all were weaker in August than in July. Analysts have been warning that, with businesses cutting jobs every month this year, consumers are bound to have difficulty keeping up spending that fuels two-thirds of national economic activity.

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.