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, especially healthcare services, that go into the calculation of the key inflation measures tracked by the U.S. central bank for monetary policy were mostly favorable last month.
Taken with the softer readings in the consumer price report, economists anticipated benign readings in the personal consumption expenditures (PCE) inflation in June.
“There does not appear to be much inflation pressure percolating on the factory floors that might affect the prices that consumers pay at the shops and malls,” said Christopher Rupkey, chief economist at FWDBONDS.
The producer price index for final demand rose 0.2 per cent 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 per cent.
In the 12 months through June, the PPI increased 2.6 per cent. That was the largest year-on-year gain since March 2023 and followed a 2.4 per cent advance in May.
A 0.6 per cent increase in the price of services accounted for the rise in the PPI. Services rose 0.3 per cent in May. They were boosted by a 1.9 per cent surge in margins for trade services, which measure changes in margins received by wholesalers and retailers, mostly reflecting a 3.7 per cent advance in machinery and vehicle wholesaling.
But the cost of transportation and warehousing services fell 0.4 per cent. Portfolio management fees rebounded 1.0 per cent, not fully reversing a 0.8 per cent drop in May. Airline fares increased 1.1 per cent, leaving the bulk of the 3.9 per cent decline in May intact. The cost of hotel and motel rooms slipped 0.2 per cent. Readings were even tamer for the series used in the calculation of medical services PCE. The cost of doctor services dropped 0.4 per cent.
“The big news is that, after applying our own seasonal adjustment, PPI hospital prices increased by only 0.1 per cent in June and the massive 1.3 per cent surge in May was revised down to a 0.6 per cent gain,” said Paul Ashworth, chief North America economist at Capital Economics.
Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among components that go into the calculation of the PCE price indexes, the inflation measures tracked by the Fed for its 2 per cent target.
PCE inflation was forecast to have edged up 0.1 per cent in June after being unchanged in May. Estimates for the core PCE price index converged around a 0.15 per cent rise. Core inflation ticked up 0.1 per cent in May. Both PCE and core inflation were seen increasing 2.5 per cent year-on-year in June after rising 2.6 per cent in May.
In light of the downward revision to PPI hospital prices, economists expected the May monthly and year-on-year inflation figures to be revised lower.
“Disinflation has gotten back on track over the last two months,” said Stephen Juneau, an economist at Bank of America Securities.
Stocks on Wall Street traded higher. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.
In addition to subsiding inflation, the labor market is also losing steam. The unemployment rate climbed to a 2-1/2-year high of 4.1 per cent in June. 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 per cent-5.50 per cent range since last July. It has hiked its policy rate by 525 basis points since 2022.
Wholesale goods prices dropped 0.5 per cent last month after falling 0.8 per cent in May, showing no impact from rising shipping costs. They were depressed by decreases in the prices of energy products, with gasoline declining 5.8 per cent after dropping 7.3 per cent in May.
Food prices fell 0.3 per cent after being unchanged in May. Egg prices, however, rebounded 55.9 per cent after dropping 34.8 per cent in May.
Excluding food and energy, goods prices were unchanged after increasing 0.2 per cent in May. The narrower measure of PPI, which strips out food, energy and trade services components, was unchanged in June. That was the lowest reading since May 2023 and followed a 0.2 per cent gain in May. The core PPI increased 3.1 per cent year-on-year after rising 3.3 per cent in May.
“The ability of businesses to pass on input costs to consumers is much more limited now than over the last few years and at best elevated input costs may just keep prices from declining more,” said Veronica Clark, an economist at Citigroup.
Consumers are taking note of the moderating price pressures, though that has not lifted spirits as the upcoming presidential election raises concerns about the economy’s trajectory.
The University of Michigan’s preliminary reading of one-year inflation expectations dipped to 2.9 per cent this month from 3.0 per cent in June. Its five-year inflation outlook also fell to 2.9 per cent from 3.0 per cent in June.
“Together with falling actual inflation, that paves the way for interest-rate cuts beginning in September,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.