U.S. producer prices were unchanged in July as goods prices fell and the cost of services increased marginally, bolstering financial market expectations that the Federal Reserve could keep interest rates unchanged next month.
The report from the Labor Department on Thursday followed news on Wednesday of mild consumer inflation last month. The data led most economists to also expect moderate readings in the Personal Consumption Expenditures price indexes in July.
The U.S. central bank tracks the PCE inflation measures for its 2% target. Financial markets had been pricing in a rate hike, but the odds have diminished considerably following last week's employment report showing unexpected job losses in July. The Federal Open Market Committee will get August CPI and employment reports before the September meeting.
"It's now looking far less likely that the FOMC will feel the need to hike as soon as September," said Stephen Brown, chief North America economist at Capital Economics.
The flat reading in the Producer Price Index for final demand last month followed a revised 0.1% drop in June, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI rebounding 0.2% following a previously reported 0.3% decline in June.
In the 12 months through July, the PPI increased 4.7% after advancing 5.5% in June. Most of the PPI data are collected early in the month, meaning that sharp oil price increases toward the end of July were probably not reflected in the PPI. As such, economists expected higher PPI readings in August, and some saw a rate hike this year as still on the table.
Goods prices dropped 0.7% after sliding 1.4% in June. Energy prices decreased 3.1%, with wholesale gasoline prices falling 5.7%. Food prices declined 0.9% as fresh and dry vegetables tumbled 34.9%. Wholesale lettuce prices plunged a record 73.0% amid a cyclosporiasis outbreak, helping to more than offset a 37.0% surge in egg prices. Grain prices shot up 14.8%.
Excluding the volatile food and energy components, goods prices rose 0.1%, lifted by a 1.3% advance in tires as well as a 1.5% increase in iron and steel scrap, and 4.2% surge in transformers and power regulators. A narrow measure, which strips out foods, energy and trade services, rose 0.4% after edging up 0.1% in June. The so-called core PPI increased 4.7% in the 12 months through July after rising 5.0% in June.
The cost of services increased 0.2% after climbing 0.5%. They were lifted by a 6.5% jump in portfolio management fees. That was partially offset by a 3.4% decrease in airline fares. Hospital outpatient prices increased 0.9%. Hotel and motel room prices fell 0.2%. The cost of transporting freight by road dropped 1.8%.
Portfolio management fees, airline fares, hotel and motel rooms are among the components that go into the calculation of the PCE inflation measures. Based on the CPI and PPI data, economists forecast the PCE price index rebounding 0.1% in July after dipping 0.1% in June. That would translate to a 3.6% year-on-year increase in PCE inflation after rising 3.7% in June.
MODERATE CORE PCE INFLATION EXPECTED
Estimates for PCE inflation, excluding food and energy, converged around a 0.2% rise. At least one economist forecast the so-called core PCE inflation climbing 0.3%. Core PCE inflation gained 0.1% in June. Estimates for the year-on-year increase in core PCE inflation ranged from 3.3% to 3.4%.
Financial markets were pricing in a roughly 67.6% chance of the Fed keeping its benchmark overnight interest rate in the 3.50%-3.75% range at its September 15-16 policy meeting, CME's FedWatch Tool showed. The odds of a rate hike were at 32.4% down from 40.6% on Wednesday and 55% a week ago.
Stocks on Wall Street rose. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
But some economists argued that Fed officials would be uncomfortable with PCE inflation well above 2% and would not rule out monetary policy tightening next month.
"If the core PCE deflator moves up by 0.25% in July, regardless of whether it rounds up or down, the 12-month advance will likely be unchanged at 3.3%, the six-month annualized gain would be 3.4%, and the three-month annualized increase would be 2.9%," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
"That seems like a pretty cut and dried argument for hiking in September, pending the August CPI figures."
"We expect the peak in inflation for this year is past and over the next year headline and core PCE price inflation is likely to gradually ebb from the methodological changes, along with a moderate easing in gasoline prices, slowly diminishing tariff effects," said Alan Detmeister, an economist at UBS.
Despite last month's job losses, layoffs remain low.
"The data are consistent with the stable unemployment rate, a 'low churn' labor market with limited hiring and firing and slow labor force growth," said Andrew Hollenhorst, chief U.S. economist at Citigroup.
