Prices for manufactured goods rose in August at a rate that exceeded earlier forecasts. While this is a positive sign for producers, it also raises some concerns over inflation pressure further down the line.

Producer prices rose in August at a rate that surpassed initial expectations, new data indicate. There were also gains in retail sales and recent improvements in manufacturing conditions across certain sectors. These signs seem to point to renewed economic activity and a strong turnaround, though worries over potential inflation problems remain as the United States emerges from the recession.

According to the latest Producer Price Index (PPI) from the U.S. Department of Labor’s Bureau of Labor Statistics, prices for finished goods increased by a seasonally adjusted 1.7 percent last month, following a 0.9 percent decline in July. The prices obtained by manufacturers of intermediate goods rose by 1.8 percent, while crude goods rose 3.8 percent. Although August 2009 prices were 4.3 percent lower than in August 2008, they improved significantly from the record 6.8 percent decline over the 12 months ending in July 2009.

These PPI gains surpassed the 1.5 percent overall increase predicted by economists surveyed by MarketWatch.

However, the PPI increases have also raised concerns regarding the prospect of rising inflation, which may become a more serious obstacle as economic activity increasingly picks up during the recovery.

“We are concerned about the outlook for inflation later in 2010, and this report suggests that inflation pressures may be beginning to stir in manufacturing,” MarketWatch quoted John Ryding and Conrad DeQuadros of RDQ Economics.

Increased prices further down the production line are adding to inflationary worries, as the prices for crude goods and manufactured intermediate goods were significantly ahead of the average gains.

Despite these concerns, the core change in PPI remains modest. According to the Bureau of Labor Statistics, 90 percent of the price increases for finished goods can be attributed to higher energy prices, which rose 8 percent in August, the largest monthly increase since November 2007. Gasoline alone rose 23 percent on the PPI.

Similar effects can be seen in intermediate and crude goods prices, with elevated energy prices accounting for the majority of the gains at these production levels. As a result, excluding the more volatile changes in food and energy, the core PPI rose only 0.2 percent in August.

This gain, though smaller, is generating cautious optimism for the industrial sector. “Industrial companies are looking pretty good, considering the economic trends, but they will certainly require some patience as we may be looking at 2011 until you see how they really did in the downturn,” Eric Schoenstein, a principal at Jensen Investment Management, told the Wall Street Journal (subscription required).

More positive signs came on Tuesday from the Federal Reserve Bank of New York’s Empire State Manufacturing Survey, which showed that the business conditions index for New York manufacturers rose by 7 points in September, reaching its highest level since November 2007 and climbing back up to pre-recession numbers.

Factory executives in the New York Fed’s district were also optimistic about the future, bringing the manufacturing outlook up to its highest level since October 2004. These figures suggest the recovery is gaining momentum, in line with the industrial sector having posted its first overall growth in 18 months this August.

“Manufacturing is coming back and it’s not just in the auto sector,” Robert Stein, senior economist at investment services firm First Trust Advisors, told Bloomberg News. “For the first time in a long time, at the early stages of an economic recovery it’s the old-time industries that are leading.”

In a speech presented at the Brookings Institute yesterday, Federal Reserve Chairman Ben Bernanke said that “from a technical perspective the recession is very likely over at this point.” Bernanke’s remarks came soon after the top economist for the International Monetary Fund declared an end to the recession.

Bernanke, like most optimistic analysts, warns that “it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward.”

Earlier

U.S. Manufacturing Finally Turns Around

Weekly Industry Crib Sheet: Reports on the Recession’s End

Research

Producer Price Indexes — August 2009
U.S. Department of Labor, Sept. 15, 2009

U.S. August Producer-Price Index Rose 1.7%
by Robert Schroeder
MarketWatch, Sept. 15, 2009

US Stocks Hit New ’09 Highs As Bernanke Says Recession Is Over (subscription required)
by Peter A. McKay and Donna Kardos Yesalavich
The Wall Street Journal, Sept. 15, 2009

Empire State Manufacturing Survey
Federal Reserve Bank of New York, Sept. 15, 2009

New York Factories Index Rises to Near 2-Year High
by Courtney Schlisserman
Bloomberg News, Sept. 15, 2009

A Year in Turmoil: An Address by Fed Chairman Ben Bernanke
The Brookings Institute, Sept. 15, 2009