U.S. March Producer Prices Rise More Than Forecast

Prices paid to U.S. producers rose almost twice as much as forecast in March, reflecting higher fuel and food costs that threaten a pickup in inflation.

The 1.1 percent gain followed a 0.3 percent increase in the prior month, the Labor Department said today in Washington. So- called core producer prices that exclude fuel and food increased 0.2 percent, as forecast.

Rising raw-material costs are hurting profits as slowing demand makes it difficult for companies to pass increases on to consumers. The need to avert a deeper economic slump will prompt Federal Reserve policy makers to lower the benchmark interest rate again this month even as inflation accelerates.

``Cost pressures are building and will continue to build for a few quarters before they recede,'' Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. ``That means margins will get crimped and profits will shrink. The Fed will cut rates again.''

A separate report today showed that manufacturing in New York state unexpectedly increased in April as new orders and shipments improved.

The New York Fed's general economic index rose to 0.6 from a March reading of minus 22.2 that was the lowest on record, the bank said today. Readings below zero signal contraction. The New York Fed began its so-called Empire index in 2001.

Treasuries Drop

Treasuries dropped after the reports, with 10-year note yields rising to 3.54 percent at 8:39 a.m. in New York, from 3.51 percent late yesterday.

Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from no change to a gain of 1.8 percent.

Estimates for core prices ranged from a 0.3 percent decrease to a 0.5 percent increase.

Producers were paid 6.9 percent more from March 2007, compared with a 6.4 percent gain in the 12 months ended in February.

Excluding food and energy, the increase was 2.7 percent from a year earlier, the most since July 2005.

So far this year, wholesale costs are up 10.2 percent at an annual pace compared with 8.4 percent at the same time last year. The core rate has increased at a 5 percent annual pace compared with 2 percent in the first three months of 2007.

Food Prices

Food prices rose 1.2 percent, led by increases in vegetables, rice and beef and veal. The 8.7 percent gain in rice was the biggest since 2002.

Wholesale energy costs climbed 2.9 percent last month and were up 20 percent since March 2007. Diesel fuel rose 15 percent and home heating oil was up 13 percent.

The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, crude oil climbed 17 percent in March on the New York Mercantile Exchange, and natural gas futures prices rose 19 percent. Oil has risen even more so far this month.

Costs of intermediate goods, those used in earlier stages of production, increased 2.3 percent, after a 0.8 percent gain the prior month. They rose 10.5 percent from a year ago.

Excluding food and energy, intermediate prices rose 1.1 percent after increasing 0.6 percent.

Prices for raw materials, or so-called crude goods, jumped 8 percent.

Pet Food

Higher prices for soap, pet food and pharmaceuticals led the gain in core prices last month.

Passenger car prices dropped 0.2 percent, while the cost of light trucks fell 0.3 percent.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. The cost of goods imported into the U.S. rose a greater-than-forecast 2.8 percent in March, Labor said last week.

Figures due tomorrow may show the consumer price index rose 0.3 percent in March after being unchanged the prior month, according to economists surveyed.

Investors are betting Fed officials will lower the benchmark rate by at least a quarter percentage point later this month after reducing it by 2 percentage points so far this year. The cumulative decline in borrowing costs is already the biggest in two decades.

Policy makers last month were more focused on the threat of a recession than inflation. ``Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely,'' minutes of their March 18 meeting showed.

Fed's Outlook

While ``uncertainties about the outlook for inflation had risen,'' the minutes said, ``the Committee expected inflation to moderate in coming quarters.''

Caterpillar Inc., the world's largest maker of bulldozers and excavators, is among companies trying to recoup some of the increases in costs. The Peoria, Illinois-based company said this month it will raise prices as much as 5 percent worldwide in July after steel, copper and crude oil became more expensive.

``By the time we get to the fourth quarter, if the steel- price increases that people are talking about do come through, it will have a pretty big impact on our material costs,'' Chief Executive Officer Jim Owens said on March 31.

Others are having less success. Alcoa Inc., the world's third-largest aluminum company, said this month that first- quarter profit was less than half that earned in the same period last year. Surging energy costs combined with lower metals prices was one reason for the slowdown.