U.S. producer prices increased slightly more than expected in June amid a rise in the cost of services, but that did not change expectations that the Federal Reserve could start cutting interest rates in September.
Details of the components in the producer price report that go into the calculation of the key inflation measures tracked by the U.S. central bank were mostly favorable. That together with the softer readings in the consumer price report led economists to expect that personal consumption expenditures (PCE) inflation rose marginally in June.
"There does not appear to be much inflation pressure percolating on the factory floors that might affect the CPI prices that consumers pay at the shops and malls," said Christopher Rupkey, chief economist at FWDBONDS.
"Producer price pressures are receding but the trend is more of a whimper than a bang."
The producer price index for final demand rose 0.2% last month after being unchanged in May, the Labor Department's Bureau of Labor Statistics said on Friday. Economists polled by Reuters had forecast the PPI nudging up 0.1%.
In the 12 months through June, the PPI increased 2.6%. That was the largest year-on-year gain since March 2023 and followed a 2.4% advance in May.
A 0.6% increase in the price of services accounted for the rise in the PPI last month. Services rose 0.3% in May.
They were boosted by a 1.9% surge in margins for trade services, which measure changes in margins received by wholesalers and retailers, mostly reflecting a 3.7% advance in machinery and vehicle wholesaling. But the cost of transportation and warehousing services fell 0.4%.
Portfolio management fees rebounded 1.0% after dropping 0.8% in May. Airline fares increased 1.1% following a 3.9% decline in the prior month. The cost of hotel and motel rooms slipped 0.2% after increasing 2.7% in May.
These are among components that go into the calculation of the PCE price indexes, the inflation measures tracked by the Fed for its 2% target.
GOODS DEFLATION
Wholesale goods prices dropped 0.5% after falling 0.8% in May. They were depressed by decreases in the prices of energy products, with gasoline declining 5.8% after dropping 7.3% in May. Food prices fell 0.3% after being unchanged in May.
Excluding food and energy, goods prices were unchanged after increasing 0.2% in May.
The government reported on Thursday that consumer prices fell for the first time in four years in June amid cheaper gasoline and a broad deceleration in the costs of goods and services, including rents.
The tame inflation data followed news last week of a rise in the unemployment rate to a 2-1/2 year high of 4.1%.
With the Fed now wary of labor market weakness, economists and financial markets are increasingly betting on a rate cut in September, with another reduction in borrowing costs expected in December. Fed Chair Jerome Powell acknowledged the improving inflation environment during his testimony before lawmakers this week, but also highlighted the risks to the labor market saying "we have seen considerable softening."
The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July. It has hiked its policy rate by 525 basis points since 2022.
The narrower measure of PPI, which strips out food, energy and trade services components, was unchanged in June after gaining 0.2% in May. The core PPI increased 3.1% year-on-year, after rising 3.3% in May.
Based on the PPI and CPI data economists estimated that the core PCE price index increased by about 0.13% in June. The core PCE price index edged up 0.1% in May.
Core inflation was seen increasing 2.5% year-on-year in June after rising 2.6% in May. Economists anticipated that May core PCE readings could be revised a touch lower.
"September rate cut on the way, and we can't completely rule out a surprise move in July," said Paul Ashworth, chief North America economist at Capital Economics.
