updated 4/14/2009 12:11:48 PM ET 2009-04-14T16:11:48

Wholesale prices dropped sharply last month as the cost of gasoline and other energy plummeted, fresh evidence that inflation appears to pose little threat to the economy.

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The Labor Department said Tuesday the Producer Price Index, which measures price changes before they reach consumers, fell by 1.2 percent in March, compared to analysts' expectations of no change. The PPI increased 0.1 percent in February.

The drop was largely driven by declining food and energy prices. Gasoline prices plummeted 13.1 percent, while home heating oil fell 13.2 percent, the sharpest drops for both since December. Food prices fell 0.7 percent.

Excluding volatile food and energy prices, the PPI was unchanged, below analysts' forecasts of a 0.1 percent rise.

The drop in wholesale prices shows inflation is unlikely to be a problem for some time given the prolonged recession, which has slowed economic activity and has already has matched the longest downturn in a quarter-century. Overall economic growth fell at an annual rate of 6.3 percent in the October-December quarter and many economists believe the gross domestic product also plunged in the first quarter of this year.

Massive government spending to bail out the financial industry and stimulate the economy, as well as a huge increase in lending by the Federal Reserve to unlock credit markets, have fueled concerns that inflation could result.

But since the recession worsened last year, Fed policymakers have focused more on the possibility of deflation. That occurs when prices fall, consumers postpone purchases and production drops, leading to a sharp economic downturn.

Those concerns may grow as wholesale prices have fallen 3.5 percent in the past year, the steepest drop in almost 60 years. But excluding food and energy price changes, the core PPI has increased 3.8 percent in the last 12 months.

Rising cigarette prices helped push the core wholesale inflation rate higher. Tobacco companies, including the Altria Group Inc.'s Philip Morris and Lorillard Inc., raised wholesale prices in March before a federal tobacco tax increase took effect April 1, according to economists at JPMorgan Chase. The tax jumped to $1.01 a pack from 39 cents.

Wholesale distributors, companies that buy from manufacturers and sell to retailers, have been clearing excess stockpiles for months in the face of weak demand and the slow economy. That also likely helped keep wholesale prices low last month.

Wholesalers cut their inventories by the largest amount in 17 years in February and increased sales for the first time since the summer, the Commerce Department said last week.

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