Producer Prices Hint at Slowing Inflation

Prices paid to U.S. producers excluding food and energy unexpectedly fell in July, the government said Tuesday, the first piece of evidence backing the Federal Reserve’s forecast that inflation will slow.

The so-called core rate dropped 0.3%, the first decrease since October, the Labor Department said. None of the 60 economists surveyed by Bloomberg News had forecast a decline.

Overall prices in July gained 0.1%.

The report fueled speculation that the Fed may keep interest rates stable at its September meeting after ending a two-year tightening campaign last week. Attention will now focus on today’s consumer price report. A lower-than-expected reading in that report would be a further sign that Chairman Ben S. Bernanke was right in advocating a pause.

“The numbers buy Bernanke some time,” said Chris Low, chief economist at FTN Financial in New York. “The criticism of the Fed has been that the economy was slowing but inflation was picking up, and Bernanke has been saying that inflation works with a lag.”

Price declines last month were led by new cars, computers and men’s clothing, the Labor Department said.

The producer price figures prompted economists at Goldman Sachs Group Inc. to cut their forecast for today’s consumer price report, the broadest measure of inflation because it includes the cost of services as well as goods.

Goldman now projects retail prices rose 0.4% last month, down from a previous forecast of 0.6%. Core prices probably rose 0.2%, rather than the 0.3% expected previously.

The producer price report “certainly weakens the view that the Fed has fallen woefully behind the curve, and reinforces the Fed’s decision,” said Richard DeKaser, chief economist at National City Corp. in Cleveland.

Still, “it’s much too soon to assign any kind of triumph over rising inflation,” he said.