Deflation threatens US producers

Oil refineries saw energy prices rise in January

A crop of new figures has alerted the US to the risk of deflation, as producer prices slipped slightly lower despite rises in the cost of food and petrol.

Also ringing faint alarm bells was the well-respected University of Michigan survey of consumer confidence, which fell for the first time since early September, the time of the terrorist attacks on the US.

But the fears were calmed by news from the US Federal Reserve of a marginal fall of just 0.1% in industrial production during January, widely seen as a sign that the US manufacturing sector is pulling out of recession.

The fall in output was the smallest for about half a year, lifted mainly by a rebound in steel production.

Meanwhile, cars, pharmaceutical goods and books rose in price during January, bringing good news to producers, even though the prices of both alcohol and cigarettes - as well as men's clothing and light trucks - was on the way down.

Deflationary pressure

When compared with the previous month, producer prices fell 0.1% in January when food and energy prices were excluded.

Falling prices are seen as bad news by economists who call it deflation.

As prices fall, profit margins are eroded across corporate America, triggering further lay-offs and bankruptcies.

Inclusive producer prices nudged 0.1% higher during January thanks to rising energy costs.

But that rise was only half of what analysts had predicted, and the fall in the core rate was unexpected.

So for America's factory owners and workers, it may be too early to stop biting their nails.

Along with the economists, America's factory owners were shaken by the fall in the Michigan consumer sentiment index to 90.9 from 93.0 in January. Economists had expected it to rise to 93.4.

Tough year

The recession - which officially began in March last year - has been painful for US manufacturers.

The prices paid to US factories and other producers fell 2.6% last month from a year earlier - the sharpest decline since February 1950.

But when food and energy was not taken into account, the prices of US goods at the factory rose 0.3% over the year.

And in January, energy prices bounced back, rising 0.1% from the previous month when energy prices fell 3.9%.

Food prices bounced back too in January, up 0.8%; the biggest increase in 11 months.

In December, producer prices were down 0.6% following a revision. The core rate did not change.

Factory input

Raw materials also became more expensive in January, though mainly because their prices dived in December.

Raw materials prices rose 3.7% in January after having fallen 9.6% in December.

Food and crude oil drove the rise last month; when these raw materials were excluded, core raw materials prices fell 0.5%.