WASHINGTON (Reuters) - U.S. wholesale prices took their sharpest tumble on record during October as energy costs fell by the largest amount since 1989 and carmakers turned to cut-rate financing to lure buyers, a government report on Friday showed.
The Labor Department's Producer Price Index, which measures costs at the factory and farm gate, plunged 1.6 percent -- the biggest drop since records were started in 1947.
The October decline was about four times larger than forecast and more than reversed back-to-back gains of 0.4 percent registered in August and September.
A weakening global economy and a bid by carmakers to clear out inventories by offering price and financing incentives both played a role in driving prices down.
Analysts said it was too soon to start speculating there might be a sustained period of price declines, but clearly inflation was not a worry for Federal Reserve policymakers if they decide to keep lowering U.S. interest rates.
Prices for finished energy products fell 7.7 percent, the biggest decline since a 7.8 percent drop in August 1989, after rising 0.9 percent in September.
GLOBAL SLOWDOWN HAVING IMPACT
Gasoline prices skidded 21.2 percent in October after rising by 6.3 percent in September and 8.7 percent in August. A faltering world economy means less demand for foreign producers' oil, which in turn means lower prices on the huge volume of crude oil the United States imports.
Excluding food and energy products, the so-called core rate of wholesale prices declined 0.5 percent in October -- the sharpest drop since a 1.2 percent fall in August 1993 -- after a 0.3 percent increase in September.
Financial markets appeared uncertain what to make of the data, especially after a subsequent report showed an apparent brightening in consumers' moods in November.
The University of Michigan's index of expectations and current conditions rose to 83.5 from 82.7 in October.
Stock prices were up marginally in early afternoon, while longer-maturity bonds edged lower.
The Fed has cut U.S. interest rates 10 times this year in the face of slowing economic activity and rising unemployment, though the University of Michigan data appeared to imply consumers were weathering the storm.
The U.S. economy contracted during the third quarter and is expected to do so again in the current quarter -- thus meeting the generally accepted definition of a recession in which national output shrinks for at least six consecutive months. Many economists think the downturn could last at least through the early months of next year before a recovery begins.
Jerry Jasinowski, president of the National Association of Manufacturers, said the bold bid by carmakers to boost sales of their products could be a vital determinant of the severity of the economic downturn.
WATCHING CAR-DEALER LOTS
New-car prices fell 4.7 percent in October after rising 1.3 percent in September. It was the biggest price decline since a 5.2 percent fall in October 1972 as cheap financing and sales incentives kicked in.
"Whether consumers respond to these incentives will play an important part in determining not so much the duration but the depth of the recession," Jasinowski said.
If new-car buying is sustained at October's brisk clip, then any recession may not be as steep, he said. "But at the same time, the recovery will likely be more gradual as major purchases are front-loaded," he added.
Cheaper producer prices mean there is less pressure on businesses to push up the prices consumers pay at supermarkets and shopping malls, but it is unclear yet whether all the wholesale reductions will show up at the store level.
"I don't think we should jump the gun and start arguing about the risk of (price) deflation yet," said economist Anthony Karydakis of Banc One Capital Markets in Chicago. "I think it is important to realize that PPI in particular is a lot more volatile than the (consumer price index) ... and is a lot more prone to producing these surprises."
The October CPI figures, which are taken as a proxy for inflation, will not be issued until next Friday.