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US producer prices rise; Fed still seen cutting interest rates

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US producer prices unexpectedly rose in August and underlying producer inflation rebounded, but the data on Wednesday did not change financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy.

[WASHINGTON] US producer prices unexpectedly rose in August and underlying producer inflation rebounded, but the data on Wednesday did not change financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy.

The Trump administration's year-long trade war with China, which has sapped business confidence, is threatening to derail the longest economic expansion in history. Fed Chair Jerome Powell reiterated last week that the US central bank would continue to act "as appropriate" to keep the expansion, now in its 11th year on track.

The Labour Department said its producer price index for final demand edged up 0.1 per cent last month as a jump in the cost of services offset the largest drop in the price of goods in seven months. The PPI gained 0.2 per cent in July.

In the 12 months through August, the PPI advanced 1.8 per cent after increasing 1.7 per cent in July. Economists polled by Reuters had forecast the PPI would be unchanged in August and rise 1.7 per cent on a year-on-year basis.

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Excluding the volatile food, energy and trade services components, producer prices jumped 0.4 per cent last month after dipping 0.1 per cent in July, the first decline since October 2015. The so-called core PPI climbed 1.9 per cent in the 12 months through August after increasing 1.7 per cent in July.

"The new data on producer prices have little implication for our monetary policy outlook," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "We expect the Fed to cut rates in September because of the downside risks to the outlook stemming mostly from the trade tensions between the US and China."

The Fed, which has a 2 per cent annual inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6 per cent on a year-on-year basis in July and has undershot its target this year.

US Treasury yields mostly rose and the dollar was trading higher against a basket of currencies.

Major US stock indexes opened higher after China's finance ministry said some US goods would be exempted from additional retaliatory tariffs ahead of a planned meeting between trade negotiators.

Financial markets have fully priced in a rate cut at the Fed's Sept 17-18 policy meeting against the backdrop of simmering US-China trade tensions, which have tipped both US and global manufacturing into recession. The Fed lowered borrowing costs in July for the first time since 2008.

US tariffs on Chinese goods were this month broadened to include consumer goods. There are fears the manufacturing downturn could spill over into the broader economy.

The economy is being supported by robust consumer spending via a strong labour market.

In August, wholesale energy prices fell 2.5 per cent after rebounding 2.3 per cent in the prior month. They were weighed down by a 6.6 per cent drop in gasoline prices, the most since January, which followed a 5.2 perent jump in July.

Goods prices declined 0.5 per cent last month, also the largest drop since January, after rising 0.4 per cent in July.

Energy prices accounted for more than 80 per cent of the drop in the cost of goods in August. Wholesale food prices fell 0.6 per cent in August after gaining 0.2 per cent in the prior month. Core goods prices were unchanged last month. They edged up 0.1 per cent in July.

Core producer goods inflation remains muted despite duties on imported Chinese goods.

"That suggests that any inflationary impact from tariffs has been offset by a weakening renminbi and substitution away from Chinese imports towards other low-cost producers in the region," said Michael Pearce, a senior US economist at Capital Economics in New York.

The cost of services increased 0.3 per cent after decreasing 0.1 per cent in July. Services were boosted by a 6.4 per cent surge in the cost of guestroom accommodation such as hotels and motels, the largest gain since April 2009.

The cost of healthcare services rose 0.2 per cent last month after edging up 0.1 per cent in July. Hospital inpatient care prices increased 0.4 per cent and the cost of doctor visits shot up 0.5per cent, reversing July's 0.5 per cent decrease. But the cost of hospital outpatient care dipped 0.1 per cent.

Portfolio management fees increased 0.5 per cent after rebounding 0.8 per cent in July. Those fees and healthcare costs feed into the core PCE price index.

A separate report from the Commerce Department on Wednesday showed wholesale inventories increased slightly in July, suggesting inventory investment could remain a drag on economic growth in the third quarter. 

REUTERS