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. Excess capacity near June’s record low of 68.3 percent 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 an “extended period.” “With weak final demand and limited cost pressure, there’s no reason to see core inflation turn up here,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. The slower gain in core prices from a year earlier “is closer to what the Fed would like to see.” Industrial production rose less than forecast in October, restrained by reductions in the manufacturing of autos and business equipment such as computers, a report from the Fed also showed today. Less Than Forecast Output at factories, mines and utilities rose 0.1 percent following an increase of 0.6 percent in September. Manufacturing production fell for the first time in four months, while utility output jumped 1.6 percent. Stock-index futures and Treasury securities were down after the reports. The Standard & Poor’s 500 contract fell 0.2 percent to 1,104.2 at 9:21 a.m. in New York. The yield on the benchmark 10-year note climbed to 3.36 percent from 3.34 percent late yesterday. Economists forecast prices would rise 0.5 percent, according to the median of 73 estimates in a Bloomberg News survey. Estimates ranged from no change to an increase of 1.3 percent. 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. Prices Falling 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. “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 70.7 percent in October compared with an average 81.1 percent since records began in 1967, the Fed’s production report showed. 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.” 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, the dollar’s 15 percent drop since March 5 according to the index which IntercontinentalExchange Inc. uses to track the currency’s value against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, 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. To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

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