Strong services costs lift US producer prices; inflation expectations dip

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. producer prices increased slightly more than expected in July as the cost of services rebounded at the fastest pace in nearly a year, but the trend remained consistent with a moderation in inflationary pressures.

The report from the Labor Department on Friday also showed goods prices outside food and energy were unchanged last month, indicating that the recent goods disinflation was becoming entrenched. Underlying producer prices also rose moderately.

The data followed on the heels of news on Thursday that consumer prices rose moderately in July. Most economists expect the Federal Reserve to leave interest rates unchanged at its policy meeting next month.

“The economy still faces some inflationary pressure from rapidly rising wages, but the cooldown of business input costs should help keep consumer prices on a downward trajectory in the fall,” said Bill Adams, chief economist at Comerica (NYSE:) Bank in Dallas.

The producer price index for final demand increased 0.3% last month. Data for June was revised lower to show the PPI was unchanged instead of nudging up by the previously reported 0.1%.

Economists polled by Reuters had expected the PPI to gain 0.2%. Some said the downgrade to June’s data meant the rise in the PPI last month was in line with expectations. In the 12 months through July, the PPI increased 0.8% after gaining 0.2% in June, boosted by a lower base of comparison last year.

The cost of wholesale services jumped 0.5% last month, the largest increase since last August, after dipping 0.1% in June.

A 7.6% surge in portfolio management fees accounted for 40% of the rise in services. Portfolio management fees had dropped 0.4% in June. Last month’s surge was likely due to the strong performance of financial markets as investors bet the Fed was probably done hiking rates. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.

There were also increases in the costs of machinery and vehicle, chemicals and allied products wholesaling as well as securities brokerage, dealing, investment advice and related services. Hospital outpatient care rebounded 0.7%, but the cost of inpatient care declined while physician care was unchanged.

Airline fares increased 1.7%, but margins for food and alcohol retailing fell 2.5%. The cost of freight and cargo transportation also declined, but transportation and warehousing increased 0.5%, the first gain in more than a year.

GOODS DISINFLATION

Goods prices ticked up 0.1% last month after being unchanged in June. A 0.5% rebound in the cost of food was largely offset by energy prices, which were unchanged. Excluding the volatile food and energy components, the so-called core goods prices were unchanged last month after falling 0.2% in June.

“The last two months of consumer goods price disinflation is on solid footing and more should be on the way,” said Will Compernolle, macro strategist at FHN Financial in New York. “This is the area of disinflation the Fed and market participants have been expecting for a while, mostly stemming from supply chain normalization.”

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

Consumers are also anticipating lower prices in the future.

The University of Michigan’s consumer sentiment survey on Friday showed consumers’ one-year inflation expectations slipped to 3.3% in August from 3.4% in July. They have been stable for three consecutive months. The five-year inflation outlook fell to 2.9% from 3.0% in the prior month, remaining in the narrow 2.9%-3.1% range for 24 of the last 25 months.

But the battle to bring inflation back to the Fed’s 2% target is far from being won. The report from the Labor Department showed the narrower measure of PPI, which strips out food, energy and trade services components, rose 0.2% after inching up 0.1% in June. In the 12 months through July, the so-called core PPI increased 2.7%, matching June’s rise.

With the CPI and PPI data in hand, economists estimated that the core personal consumption expenditures price index increased 0.2% in July, matching June’s gain. The core PCE price index, which is one of the inflation measures tracked by the Fed for monetary policy, is forecast to rise 4.3% on a year-on-year basis after advancing 4.1% in June. As with all the July inflation data, the pick-up in the annual core PCE rate is due to unfavorable base effects.

The PCE price index data will be published later this month.

“Despite continued disinflationary pressures continuing to build and inflation moving closer to the Fed’s 2% target, we are not out of the woods yet,” said Eugenio Aleman, chief economist at Raymond James.

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