Slower inflation gives policy makers more room to cut their benchmark rate today in an effort to sustain the expansion in the face of a housing recession. A drop in fuel expenses pushed prices down in August and slacker economic growth will continue to restrain raw-material costs, economists said.
The Fed ``can point to reasonably good news on inflation,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York, who accurately forecast the core rate. ``The weakness in the economy is making it difficult for companies to pass along increases. That bodes very well'' for inflation in coming months, he said.
The producer-price report is the second of three monthly inflation gauges. The government said on Sept. 14 that import prices dropped 0.3 percent in August, the first decline in seven months. Figures for consumer prices will be issued tomorrow.
Central Bank `Luxury'
``There is little residual inflation pressure in the U.S. economy,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``The fact that most measures of core inflation have shown tame readings as of late gives the Fed the luxury of cutting rates aggressively if need be.''
The Fed cut the rate on loans to banks on Aug. 17 as global stock markets slumped on concern damage from rising mortgage defaults was spreading. At the time, policy makers dropped language indicating their bias toward fighting inflation and instead highlighted a rising threat to economic growth.
The Federal Open Market Committee will announce its decision at about 2:15 p.m. in Washington.
The yield on U.S. Treasury securities rose following the report. The yield on the benchmark 10-year note was 4.49 percent at 9:45 a.m., compared with 4.47 percent late yesterday.
Exceeding Estimates
Economists forecast producer prices would decline 0.3 percent after a 0.6 percent increase, according to the median of 76 projections in a Bloomberg News survey. Core prices were expected to rise 0.1 percent.
Over the past 12 months, producer prices rose 2.2 percent, down from a 4 percent increase in July. The year-over-year increase in costs excluding food and energy also eased to 2.2 percent compared with 2.3 percent in July.
A separate report from the Treasury Department showed foreign buying of U.S. securities slowed in July to the weakest pace in seven months as a rout in the subprime mortgage market sapped demand for American bonds.
Total holdings of equities, notes and bonds rose a net $19.2 billion, from a revised $97.3 billion in June.
Economists almost universally forecast the Fed will cut the benchmark overnight lending rate between banks for the first time since 2003. The median calls for a quarter-point cut to 5 percent.
Energy Expenses
The drop in wholesale prices last month was led by a 6.6 percent decline in energy costs that was the biggest since April 2003. Costs for gasoline, natural gas, heating oil and diesel fuel all fell.
Costs of intermediate goods, such as steel used in earlier stages of production, fell 1.2 percent in August, after a 0.6 percent increase the prior month. They were up 2.4 percent from a year ago.
Excluding food and energy, intermediate prices fell 0.5 percent and were up 2.4 percent from August 2006.
Prices for raw materials, or so-called crude goods, dropped 3 percent.
The cost of consumer goods fell 1.8 percent as food charges fell and prices for capital goods rose 0.1 percent.
Faced with the prospect of an economic slowdown, some companies are lowering prices to stoke demand ahead of the key holiday-spending season in the last three months of the year. Apple Inc. Chief Executive Officer Steve Jobs earlier this month cut the price of the iPhone by $200 to boost sales. The calendar fourth quarter and the back-to-school season that just ended are Apple's two busiest periods.
Price Increases
Others are suffering from increases in commodity costs and are boosting prices as a result.
``We've already raised prices and have more planned,'' Sara Lee Corp. Chief Executive Officer Brenda Barnes told analysts last week. ``We are certainly facing these headwinds of increased commodity costs, some of them at unprecedented levels, like wheat.''
Sara Lee fell $10 million short of covering the jump in raw-material costs, even after raising prices on bread and coffee, Barnes said.
