By Courtney Schlisserman Nov. 17 (Bloomberg) -- Wholesale prices in the U.S. increased in October for just the second time in the past four months, indicating inflation will not be a concern for the Federal Reserve. The 0.3 percent increase in prices paid to factories, farmers and other producers was smaller than forecast and followed a 0.6 percent drop in September, according to Labor Department data released today in Washington. Excluding food and fuel, so-called core prices unexpectedly dropped 0.6 percent, capping the smallest 12-month gain in five years. Near-record excess capacity will probably prevent suppliers from passing on the recent rebound in commodity costs for months to come. The report underpins Fed expectations, reiterated yesterday by Chairman Ben S. Bernanke, that inflation will be “subdued,’ allowing policy makers to keep interest rates low for a long time. “Core measures of inflation continue to be remarkably tranquil, if not trending downward,” Richard DeKaser, chief economist at Woodley Park Research in Washington, said before the report. “I think this gives the Fed all the leeway they require to stand on the sidelines.” Economists forecast prices would rise 0.5 percent, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from no change to an increase of 1.3 percent. Excluding Food, Fuel The decrease in prices excluding food and energy last month was the biggest since July 2006. The core measure was forecast to rise 0.1 percent after a 0.1 percent drop a month earlier, according to the Bloomberg News survey. Compared with a year earlier, companies paid 1.9 percent less for goods today’s report showed. Core costs were up 0.7 percent from a year earlier, the smallest 12-month gain since March 2004. Prices overall were buoyed by 1.6 percent increases in both food and fuel as the cost of everything from gasoline to vegetables and fruit climbed. Declining prices of light trucks and passenger cars, which reflected the switch to the 2010 model year, pushed core costs lower. Producer prices are one of three monthly inflation gauges reported by the Labor Department. The cost of imported goods rose 0.7 percent in October and increased 0.4 percent excluding energy. The government is scheduled to release its consumer price report tomorrow. ‘Subdued’ Inflation “Inflation seems likely to remain subdued for some time,” Bernanke said yesterday in a speech to the Economic Club of New York. He also said “significant economic challenges remain.” One challenge is trying to absorb excess capacity. The share of plants in use reached 68.3 percent in June, the lowest level since records began in 1967, according to Fed data. Economists track operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. Fed policy makers this month reiterated plans to keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. Some companies still see pressure to hold down costs. Wal- Mart Stores Inc. Chief Executive Officer Michael T. Durke said the company continues “to experience ongoing deflation across our businesses.” Falling Prices Huntsman Corp., a chemical maker, said Nov. 4 that third- quarter sales fell 23 percent to $2.11 billion as a 3 percent increase in volumes could not make up for a 25 percent drop in prices. Nonetheless, a falling dollar and expanding global economies are forcing up commodity costs. The U.S. last week raised its forecast for crude-oil prices this year and next on speculation that demand will rise as the global economy improves. “Commodity prices are responding to the weak dollar by rising but core measures are responding to economic slack,” Woodley Park Research’s DeKaser said. To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

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