Washington: U.S. producer costs succumbed to a second straight month in August as the expense of gasoline declined further, resulting in the smallest yearly increase in a year, which could ease fears of inflation becoming entrenched.
The report from the Labor Department on Wednesday also showed fundamental producer inflation rising moderately last month, recommending that growled supply ties were loosening up. It followed on the heels of news on Tuesday of an unexpected increase in monthly consumer costs in August, which established assumptions for a third 75 basis points interest rate hike from the Federal Reserve next Wednesday.
“Today offers a bit of good news that the economy’s supply chain headwinds are starting to diminish,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “While inflation isn’t completely contained, there is hope that the diminished pressures on PPI goods prices will lead to less inflation in the future for the goods sitting on store shelves that consumers buy.”
The producer cost record for final demand dipped 0.1% last month after slipping 0.4% in July, the first back-to-back decrease in the PPI since the spring of 2020.
In the 12 months through August, the PPI rose 8.7%. That was the smallest year-on-year gain since August 2021 and followed a 9.8% expansion in July.
A 1.2% drop in costs for products represented the fall in the month-to-month PPI, which was following economists’ assumptions. The drop in product costs, which followed a 1.7% plunge in July, was largely driven by a 12.7% tumble in the cost of gasoline. Food prices were unaltered.
Excluding food and energy, producer goods costs rose 0.2%, matching July’s benefit. The second straight monthly moderate expansion in the so-called core goods costs is mostly the result of easing global supply chains and a shift in domestic spending back to services.
Analysts say core goods prices hold the key to slower inflation, despite August’s strong consumer inflation readings, which were in part supported by more expensive new motor vehicles.
“Most likely retail goods prices will at least soften somewhat in line with PPI and that should keep Fed officials breathing a small sigh of relief after the still-high, but not unexpectedly strong PPI reading,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.
Stocks on Wall Street were trading higher after Tuesday’s sharp sell-off. The dollar slipped against a basket of currencies. U.S. Treasury costs fell.
Fed officials assemble next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a 75 basis points rate increase next Wednesday, with the potential for a full rate point ascend, according to CME’s FedWatch Tool.
The U.S. central bank has twice hiked its policy rate by three-quarters of a percentage point, in June and July. Since March, it has lifted that rate from near zero to its ongoing scope of 2.25% to 2.50%.
The price of services expanded 0.4% in August after rising 0.2% in July. 60% of last month’s advance in services was attributed to a 0.8% rise in margins received by wholesalers and retailers. Costs for portfolio management rose. However, there were decreases in the costs of truck transportation of freight and guestroom rental, as well as food and liquor retailing.
A tight labor market, with two employment opportunities for every jobless person at the end of July, accounts for much of the gain in the cost of services.
“The nagging problems with U.S. inflation are not with goods prices but with services prices,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “As long as the labour market remains tight, services prices will remain elevated.”
Barring the volatile food, energy, and exchange services components, producer prices gained 0.2% in August. The so-called core PPI edged up 0.1% in July. In the 12 months through August, the core PPI advanced 5.6%. That was the smallest year-on-year gain since June 2021 and followed a 5.8% rise in July.
With the PPI and CPI information close by, economists are determining that the individual consumption expenditures (PCE) price index, excluding food and energy, rose about 0.5% in August after ticking up 0.1% in July.
That would result in the core PCE cost index rising 4.7% year on year after rising 4.6% in July. The core PCE cost index is one of the inflation measures tracked by Fed officials for the central bank’s 2% objective.
August PCE cost index data will be released at the end of the month, and will likely show the difference between overall and core inflation, which was evident in the CPI report.
“There is a divergence in headline and core inflation building, where the headline is cooling and core is heating up,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. “That’s an odd phenomenon and likely influenced by the shift from goods to services post-pandemic.”