U.S. producer prices increased less than expected in July as an energy-driven rebound in the cost of goods was tempered by cheaper services, indicating that inflation continued to moderate in support of an interest rate cut next month.
The fairly benign report from the Labor Department on Tuesday also showed favorable readings for most of the components that go into the calculation of the inflation measures tracked by the Federal Reserve for monetary policy.
"Producer price increases cooled this month which is good news for the Fed's inflation fight, but there is no PPI deflation, so Fed officials do not have to rush to judgment and bring rate cuts forward because the economy is headed downhill," said Christopher Rupkey, chief economist at FWDBONDS.
The producer price index for final demand edged up 0.1% last month after rising by an unrevised 0.2% in June, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.2%.
In the 12 months through July, the PPI increased 2.2% after climbing 2.7% in June.
Goods prices rebounded 0.6%, the largest gain in five months, after falling for two straight months. A 1.9% increase in energy prices accounted for nearly 60% of the rise in goods prices. Wholesale gasoline prices increased 2.8%. There were also increases in the prices of diesel and jet fuel.
Wholesale food prices shot up 0.6% after nudging up 0.1% in June. Meats, fresh fruits and melons cost more relative to the prior month. Excluding the volatile food and energy components, goods prices gained 0.2% after being unchanged in June.
Services prices fell 0.2%, the largest decline since March 2023, after rising 0.4% in June. That reflected a 1.3% drop in trade services, which measure changes in margins received by wholesalers and retailers. Margins for machinery and vehicle wholesaling fell 4.1%.
There were also decreases in margins for food and alcohol retailing as well as automobiles, automotive fuels and lubricants retailing, and desktop and portable device application software publishing. But the cost of transportation and warehousing services rose 0.4%.
Airline fares fell 0.2% after rising 0.4% in June. Healthcare and medical insurance costs ticked up 0.1% following a 0.2% gain in the prior month.
The cost of physician services fell 0.2%, while hospital inpatient care rose 0.2% after climbing 0.4% in June. Hotel and motel room prices dropped 0.4% after declining 0.5% in June. Portfolio management fees increased 2.3%, a gain that is likely to be reversed following a recent stock market sell off.
Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among components that go into the calculation of the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2% target.
"We modestly lowered our tracking of core PCE inflation from 0.20% to 0.18%, with a final forecast more dependent on CPI data released tomorrow," said Veronica Clark, an economist at Citigroup.
Slowing inflation and a cooling labor market have led financial markets to anticipate that the Fed will start its easing cycle in September. With the U.S. central bank now increasingly concerned about labor market weakness, after the unemployment rate surged to near a three-year high of 4.3% in July, a rate cut of 50 basis points cannot be ruled out.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year, having raised it by 525 basis points in 2022 and 2023.
Excluding food, energy and trade, prices rose 0.3% after edging up 0.1% in June. The core PPI increased 3.3% year-on-year after rising 3.2% in June.
