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Weak US producer prices support another Fed interest rate cut

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The producer price index for final demand dropped 0.3 per cent last month, weighed down by decreases in the costs of goods and services, the government said.

[WASHINGTON] US producer prices unexpectedly fell in September, leading to the smallest annual increase in nearly three years, which could give the Federal Reserve room to cut interest rates again later this month.

The weak producer inflation readings reported by the Labour Department on Tuesday came against the backdrop of a slowing economy amid trade tensions and cooling growth overseas. The Fed cut rates in September after reducing borrowing costs in July for the first time since 2008, to keep the longest economic expansion on record, now in its 11th year, on track.

The producer price index for final demand dropped 0.3 per cent last month, weighed down by decreases in the costs of goods and services, the government said. That was the largest decline since January and followed a 0.1 per cent gain in August.

In the 12 months through September the PPI increased 1.4 per cent, the smallest gain since November 2016, after rising 1.8 per cent in August. Economists polled by Reuters had forecast the PPI nudging up 0.1 per cent in September and advancing 1.8 per cent on a year-on-year basis.

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Excluding the volatile food, energy and trade services components, producer prices were unchanged last month after jumping 0.4 per cent in August. The so-called core PPI increased 1.7 per cent in the 12 months through September after climbing 1.9 per cent in August.

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 1.8 per cent on a year-on-year basis in August and has undershot its target this year.

Some economists expect the US central bank could cut rates at its Oct 29-30 policy meeting amid signs that the Trump administration's 15-month trade war with China, which has weighed on business investment and pushed manufacturing into recession, was impacting the broader economy.

While the unemployment rate dropped to near a 50-year low of 3.5 per cent in September, hiring slowed significantly, with the three-month average gain in private payrolls falling to 119,000 jobs, the smallest since July 2012, from 135,000 in August.

In addition, private services industry growth slowed to a three-year low in September.

REUTERS