US underlying producer prices increase solidly in May

[WASHINGTON] US producer prices increased solidly for a second straight month in May, boosted by a surge in the cost of hotel accommodation and gains in a range of other services, pointing to a steady pickup in underlying inflation pressures.

The Labor Department said on Tuesday producer prices excluding food, energy and trade services rose 0.4 per cent last month, matching April's gain. The so-called core PPI increased 2.3 per cent in the 12 months through May after rising 2.2 per cent in April.

Weaker energy and food prices, however, partially offset the increase in services last month. That led to the producer price index for final demand to edge up 0.1 per cent in May after gaining 0.2 per cent in April. In the 12 months through May, the PPI climbed 1.8 per cent, slowing from April's 2.2 per cent advance.

Economists polled by Reuters had forecast the PPI would nudge up 0.1 per cent in May and rise 2.0 per cent on a year-on-year basis.

The steady rise in underlying producer prices likely supports the Federal Reserve's view that the weak inflation readings are probably transitory.

The Fed's preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6 per cent in the year to April after gaining 1.5 per cent in March.

An escalation in trade tensions, slowing growth and a sharp step-down in hiring in May led financial markets to price in at least two interest rate cuts from the Fed by the end of the year.

Fed Chairman Jerome Powell said last week that the US central bank was closely monitoring the implications of the trade tensions on the economy and would "act as appropriate to sustain the expansion." Fed policymakers are, however, expected to keep rates unchanged when they meet on June 18-19.

In May, wholesale energy prices fell 1.0 per cent in May after rising 1.8 per cent in the prior month. Goods prices slipped 0.2 per cent last month after gaining 0.3 per cent in April.

Wholesale food prices dropped 0.3 per cent in May. Core goods prices were unchanged for a second straight month. Prices for hotel accommodation surged 10.1 per cent in May, the most since April 2009. That accounted for nearly 80 per cent of the increase in services prices last month. Services prices rose 0.3 per cent after gaining 0.1 per cent in April.

The cost of healthcare services increased 0.2 per cent last month after increasing 0.3 per cent in April. Those healthcare costs feed into the core PCE price index. There were also increases in prices for passenger transportation and portfolio management.

REUTERS