Economists Call Core Inflation 'Tame' Despite Soaring Energy Prices

Economists say the main story in June's producer price index is that core prices, which exclude food and energy, remain contained despite soaring costs from energy driving up the headline index.

The U.S. Labor Department's seasonally adjusted core measure of producer prices rose by 0.2% in June, lower than the consensus forecast, but total prices moved up 1.8%, four-tenths higher than consensus.

Ken Beauchemin, U.S. economist at Global Insight, said "the take-away is that core prices continue to be muted in the face of a lot of pressure - massive pressure - from commodities."

He said the 1.8% monthly gain in headline prices is "huge," but "technically speaking it's not 'inflation,'" he added, as the rise in prices is not caused by loose monetary policy.

Beauchemin said it only makes sense for the Fed to continue looking at core rates, because switching to headline inflation wouldn't help build a regime of stable expectations and it would only confuse the public.

Overall, he said the report was "okay news," but said the consumer price index, which comes out Wednesday, is more important. Global Insight expects core CPI to rise 0.2% and total CPI to advance 0.9% on the month.

Charmaine Buskas, senior economics strategist at TD Securities, called the rise in core rates "tame on both a monthly and annual basis," noting that outside of energy prices, which rose 6.0% in the month, most other consumer goods were also tame.

"On balance, this is not out of line with what we've seen with consumer prices in that energy prices remain a key upward source of price pressure and suggests that at all levels of production and consumption, energy prices are playing a major role," she added.

From a year ago, the core measure of producer price inflation was up 3.0%, two-tenths lower than expectations and the same pace as last month. The annual headline rate came in at 9.2%, half a percentage point higher than the consensus forecast of 8.7% and up from the previous month's annual gain of 7.2%.

"The year-over-year core rate has now been at 3.0% for the past three months, overshooting the pace implied by the lagged rise in core materials costs," said Ian Shepherdson, chief U.S. economist at HFE.

"We don't see much more upside to core finished goods, but if we're wrong it will just mean the margin squeeze on businesses will be even more intense, because customers can't pay more," he added.

By Patrick McGee and edited by Sarah Sussman