UPDATE: US Deflation Fears Ease; Feb Payrolls Set To Plunge

UPDATE: US Deflation Fears Ease; Feb Payrolls Set To Plunge

(Updates with comments from economists)

   By Brian Blackstone    Of DOW JONES NEWSWIRES  

WASHINGTON -(Dow Jones)- U.S. producer prices rebounded last month for a wide range of products from energy and automobiles to prescription drugs, easing concerns of a deflationary spiral of lower prices and spending.

Meanwhile, the recession is still taking a severe toll on labor markets, as evidenced by a new record high level of total jobless claims lasting more than one week to almost 5 million. Initial claims last week suggest another dismal employment report for February.

The producer price index for finished goods rose 0.8%, the Labor Department said Thursday, reversing some of the December's 1.9% plunge. Wall Street economists surveyed by Dow Jones Newswires had expected only a 0.3% rise. The PPI was down 1% from a year earlier.

The core PPI, which excludes food and energy, advanced 0.4% last month, well above expectations for a 0.1% rise. That was up 4.2% from a year ago.

On Wednesday, the Labor Department reported a sixth-straight drop in import prices for January. Consumer prices set for release Friday are expected to show a modest rise of 0.2% after falling sharply in December. Consumer prices rose just 0.1% in 2008, the lowest calendar-year increase since the 1950s.

Normally, signs of disinflation would be a welcome reprieve for households that saw their purchasing power erode early last year on soaring energy and food prices. But in the current climate, soft price data reflect hard economic times that might cause consumers and businesses to delay purchases. That in turn could lead to deflation - a downward spiral of lower prices and declining spending and investment.

In a speech Wednesday, Cleveland Fed President Sandra Pianalto said officials are now worried about an "unwelcome disinflation." Thursday's sharp PPI rise, both at the headline and core levels, should ease that fear.

Paul Ashworth, economist at Capital Economics in Toronto, noted "there is, as yet, little evidence that (the decline in energy and commodity prices) is spreading to the prices of other goods."

Indeed, the PPI increase was fairly broad based. Energy prices posted a 3.7% rise last month, led by a 15% increase in wholesale gasoline prices.

Prices of passenger cars rose 0.3% on the month, while light truck prices advanced 0.5%. Prices of communication and related equipment rose a record 1.3%, while pharmaceutical preparations jumped 1.1%.

In contrast, food prices were down 0.4%.

"Although the lagged effect of past increases in commodity prices has persisted longer than we expected, eventually this shock will likely begin to fade from the data," Nomura economist Zach Pandl said in a research note. Deeper in the production pipeline, prices mostly fell, suggesting soft wholesale-price readings in coming months. Prices of raw materials, known as crude goods, slid 2.9% on the month, while core crude goods prices advanced 0.1%.

Intermediate goods prices fell 0.7%. Core intermediate goods decreased 1.1% on the month.

In a separate report, the Labor Department said initial claims for jobless benefits were unchanged at 627,000 after seasonal adjustments in the week ended Feb. 14. That's just 4,000 shy of the 26-year high reached at the end of January.

The U.S. has lost 3.6 million jobs since the recession started in December 2007, with about half of those losses coming in the last three months alone, including the largest monthly drop in over 30 years last month, 598,000.

Thursday's initial claims report includes the survey week for February payrolls. When employers are surveyed for the monthly employment report, they are asked about staffing levels for the pay period that includes the 12th day of the month. For that reason, many economists pay close attention to the jobless-claims data for that week.

Abiel Reinhart, economist at JPMorgan Chase, said that based on the claims data, a February payroll drop of around 615,000 "seems reasonable."

That would likely push the unemployment rate higher. It currently stands at a 16-year high of 7.6%.

In comments Wednesday, Fed Chairman Ben Bernanke said he expects it to rise above 8% in coming months. The Fed's quarterly economic forecasts project that the unemployment rate could climb as high as 8.8% by the end of the year, a forecast supported by the latest claims figures.

Meanwhile, continuing claims - those drawn by workers collecting benefits for more than one week in the week ended Feb. 7 - soared 170,000 to 4,987,000. That's the highest level since the government started keeping track in 1967, a sign of just how difficult it is for laid-off workers to find new jobs.

Continuing claims are up more than 2 million in the past year.

-By Brian Blackstone; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com

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(END) Dow Jones Newswires

February 19, 2009 10:19 ET (15:19 GMT)

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