U.S. producer inflation boosted by higher energy prices

By Lucia Mutikani

U.S. producer prices recorded their largest gain in more than four years in January amid increases in the cost of energy products, but a strong dollar continued to keep underlying inflation at the factory gate tame.

Rising raw material costs are boosting producer prices across the globe, notably in China, which is the biggest source of U.S. imports. But economists still expect overall U.S. inflation to keep climbing gradually given the buoyant dollar.

“China saw the biggest price gain since 2011 in January. Given that most of the upward price pressure is the result of raw materials prices returning from the depths of last year, the longer-term view continues to be wary but not alarmed,” said Jay Morelock, an economist at FTN Financial in New York.

The U.S. Labor Department said on Tuesday its producer price index for final demand jumped 0.6 percent last month, which was the biggest rise since September 2012 and followed a 0.2 percent gain in December. Higher prices for some services also contributed to the increase in January.

Economists had expected the PPI to rise 0.3 percent in January. Despite the surge, the PPI only increased 1.6 percent in the 12 months through January after a similar gain in December. A measure of underlying producer price pressures that excludes food, energy and trade services advanced 0.2 percent after edging up 0.1 percent in December.

The so-called core PPI rose 1.6 percent in the 12 months through January, slowing from December’s 1.7 percent gain. The Federal Reserve has a 2 percent inflation target.

Gradually rising inflation together with a tightening labor market and firming economic growth should position the Fed to continue raising interest rates this year. The U.S. central bank raised rates in December and projected three more hikes in 2017.

Fed Chair Janet Yellen told U.S. lawmakers on Tuesday that waiting too long to raise borrowing costs would be “unwise.”

The dollar .DXY was trading higher on Yellen’s comments, touching a three-week high against a basket of currencies. U.S. government bond prices fell while stocks on Wall Street were mixed.

DOLLAR STRENGTH

More U.S. manufacturers are reporting paying higher prices for raw materials. The Institute for Supply Management’s (ISM) prices index surged in January to its highest level since May 2011.

Closely correlated to the PPI, the ISM index has advanced for 11 straight months. Those gains largely reflected increases in the prices of commodities such as crude oil, which are rising due to a steadily growing global economy. Oil prices have climbed above $50 per barrel.

But with the dollar strengthening further against the currencies of the United States’ main trading partners and wage growth still moderate, the spillover to consumer inflation from rising commodity prices is likely to be limited.

A government report on Friday showed import prices excluding fuels fell in January for a third straight month. Data on Wednesday is expected to show the consumer price index increased 0.3 percent last month after a similar gain in December, according to a Reuters survey of economists.

“While the trend in inflation remains upward, it is not quickening as fast as today’s headline suggests. Inflation is not an immediate issue for the Fed,” said Sarah House, an economist at Wells Fargo Securities in New York.

Last month, prices for final demand goods increased 1.0 percent, the largest rise since May 2015. The gain accounted for more than 60 percent of the increase in the PPI. Prices for final demand goods advanced 0.6 percent in December.

Wholesale food prices were unchanged last month after climbing 0.5 percent in December. Healthcare costs edged up 0.2 percent. Those costs feed into the Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) index.

The volatile trade services component, which measures changes in margins received by wholesalers and retailers, shot up 0.9 percent in January after being unchanged in the prior month.

Originally posted at: http://www.reuters.com/article/us-usa-economy-idUSKBN15T1PS

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Energy costs factor into business development, expansion decisions

By Shira Schoenberg

When the Massachusetts Green High Performance Computing Center was seeking a location, it chose Holyoke for two reasons: the city’s low electricity prices and its access to interstate highways and a fiber optic communications network.

“We think about the cost of electricity every day,” says the computing center’s executive director, John Goodhue.

For many businesses, whether they rely on powerful computers or manufacturing equipment, the price of electricity is a major part of the cost of doing business.

When businesses look to relocate, electricity costs can be a substantial factor in a company’s decision to move to Western Massachusetts. And cities like Holyoke that have municipally owned utilities may have a leg up when it comes to price.

Municipally owned utilities are typically able to offer cheaper electricity than the major investor-owned companies, although the investor-owned utilities say they offer other benefits to compensate for higher prices.

“It’s a significant cost of doing business, and it goes directly to a company’s bottom line,” says Richard K. Sullivan Jr., president and CEO of the Western Massachusetts Economic Development Council, who served as the state’s secretary of energy and environmental affairs under former Gov. Deval Patrick. “By and large, Western Massachusetts can be very competitive on utility costs with most everywhere in New England. If you take a look at the municipal (utilities), we can be more competitive than the eastern part of the state.”

In general, the Northeast is one of the most expensive regions in the country for electricity. “It’s absolutely one of the significant factors that companies look at when they’re looking at expansion opportunities or coming into a new area to build new,” Sullivan said.

Competitive prices in Western Massachusetts can make a difference in attracting business, and particularly the smaller municipal utilities have shown a willingness to work with companies, according to Sullivan.

“Certainly, the private companies in Western Massachusetts are always willing to sit and have discussions about an economic development rate or some other type of service that they can provide to be more competitive,” he said.

In Massachusetts, there are two kinds of utilities. The major companies — which in Western Massachusetts include Eversouce, National Grid and Unitil — are for-profit companies owned by investors. They are regulated by the state.

Some communities — including Holyoke, Westfield, Chicopee, South Hadley and Chester — own their own utilities. These are nonprofits governed by municipal boards. There are 41 municipal utilities statewide, but because of provisions in state law, no new municipal utility has opened since 1926.

Basic service prices for investor-owned utilities in the western part of the state already tend to be lower than in northeastern Massachusetts. And municipally owned utilities can often offer even lower prices.

A website operated by the Massachusetts Alliance for Municipal Electric Choice, an advocacy group that supports allowing more municipally owned utilities, found that the average monthly residential bill for 500 kilowatt-hours of electricity in 2016 was $73 for municipal utilities and between $99 and $105 for the four major investor-owned utilities.

“They’re simply more efficient,” said Patrick Mehr, who maintains the Massachusetts Alliance for Municipal Electric Choice website.

The two types of utilities disagree on why the prices are different, and both say they offer plenty of benefits to attract businesses.

Municipal utilities do not have to pay property taxes, while investor-owned utilities do, on every pole and wire. Eversource, for instance, pays Springfield around $9 million annually in taxes and Pittsfield $3 million.

However, most municipal power companies voluntarily make payments in lieu of taxes to their communities, based on the value of their property.

As the Massachusetts attorney general, Healey’s job is to act as the consumer’s lawyer in the upcoming rate-setting process.

Investor-owned utilities also have state requirements that add to their costs: participating in renewable energy programs; offering energy efficiency programs; providing discounts to low-income consumers; and complying with various standards related to buying alternative energy and allowing competitive suppliers to market to their customers. State programs to subsidize the development of renewable energy are also paid for by investor-owned utilities.

For example, businesses in Springfield, Greenfield, Pittsfield and elsewhere have participated in an Eversource program that provides free energy efficiency upgrades to small, local businesses.

Municipal utilities may offer some of these programs voluntarily, but they are not mandated and may not be as comprehensive.

Investor-owned utilities maintain the infrastructure and transmission lines for the electric grid. They are for-profit and larger companies. That means they may pay their chief executives higher salaries, and they pay dividends to shareholders.

Another major difference is that, under state law, investor-owned utilities that distribute power are not allowed to own their own power generation facilities, while municipal-owned utilities are. So, for example, Holyoke Gas & Electric owns and operates the Hadley Falls Dam on the Connecticut River. Ownership means the utilities can get better rates on the power.

State regulations also bar investor-owned utilities from soliciting long-term contracts, which municipal utilities can do.

The municipal companies have smaller geographic areas to maintain, which can help reduce costs and also ensure that linemen know the system well.

Dan Howard, general manager of Westfield Gas and Electric, says having a municipal light company benefits the city, residents and businesses. “Because we’re locally controlled and operated, we have a high public accountability,” Howard said. “When something’s not going right, the consumers of electricity and natural gas in Westfield know exactly who to call.”

Westfield’s utility company maintains city traffic lights and lets the city use its communication towers. Howard said when a new business is considering Westfield, the power company works with city and business officials on a case-by-case basis to figure out what the company’s electricity needs are and how to balance an attractive package for the business with ensuring other ratepayers are not subsidizing it.

Investor-owned utilities counter that they have other features that make them attractive.

Priscilla Ress, of Eversource, said the company in 2016 invested $940 million in maintaining and upgrading the company’s electric system. “Building a better, stronger, smarter grid will improve reliability for our customers no matter the weather, and that’s good for any business looking to locate within the communities we serve,” Ress said.

Spokeswoman Amie O’Hearn mentioned reliability as a major reason to choose National Grid. If there is a big storm, National Grid can call on crews from Massachusetts, Rhode Island and New York, as well as contractor crews and mutual aid agreements, to fix the power lines.

Often, the choice simply depends on what an individual company is looking for.

Goodhue, of the Green High Performance Computing Center, says he appreciates the responsiveness of a smaller company, and he believes the center, which uses a huge amount of power for computing, got good rates because Holyoke has a municipally owned power source.

“Electricity matters a lot,” Goodhue said. “When you’re planning to consume maybe 10 megawatts of electricity (a day) on a steady basis, that’s a big part of your budget, day in and day out.”

Originally posted at: http://www.masslive.com/politics/index.ssf/2017/02/as_businesses_consider_wmass_m.html

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