U.S. producer prices notch second straight monthly decline in August

© Reuters. FILE PHOTO: A person uses a petrol pump at a gas station as fuel prices surged in Manhattan, New York City, U.S., March 7, 2022. REUTERS/Andrew Kelly

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. producer prices fell for a second straight month in August as the cost of gasoline declined further, resulting in the smallest annual increase in a year, which could allay fears of inflation becoming entrenched.

The report from the Labor Department on Wednesday also showed underlying producer inflation rising moderately last month, suggesting that snarled supply chains were loosening up. It followed on the heels of news on Tuesday of a surprise increase in monthly consumer prices in August, which cemented expectations 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 price index for final demand dipped 0.1% last month after slipping 0.4% in July, the first back-to-back decline 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% increase in July.

A 1.2% drop in prices for goods accounted for the fall in the monthly PPI, which was in line with economists' expectations. The drop in goods prices, which followed a 1.7% plunge in July, was largely driven by a 12.7% tumble in the cost of gasoline. Food prices were unchanged.

Excluding food and energy, producer goods prices rose 0.2%, matching July's gain. The second straight monthly moderate increase in the so-called core goods prices is mostly the result of easing global supply chains and a shift in domestic spending back to services.

Economists say core goods prices hold the key to slower inflation, despite August's strong consumer inflation readings, which were in part boosted 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 (NYSE:C) 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 prices fell.

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SERVICES PUSH HIGHER

Fed officials gather next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a 75 basis points rate increase next Wednesday, with potential for a full percentage point rise, 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 current range of 2.25% to 2.50%.

The cost of services increased 0.4% in August after rising 0.2% in July. Sixty percent of last month's advance in services was attributed to a 0.8% rise in margins received by wholesalers and retailers. Prices for portfolio management rose. But there were decreases in the costs of truck transportation of freight and guestroom rental, as well as food and alcohol retailing.

A tight labor market, with two job openings for every unemployed person at the end of July, accounts for much of the increase 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 (NASDAQ:LPLA) in Charlotte, North Carolina. "As long as the labor market remains tight, services prices will remain elevated."

Excluding the volatile food, energy and trade 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 rise since June 2021 and followed a 5.8% increase in July.

With the PPI and CPI data in hand, economists are forecasting that the personal consumption expenditures (PCE) price index, excluding food and energy, increased by about 0.5% in August after ticking up 0.1% in July.

That would result in the core PCE price index climbing 4.7% year-on-year after rising 4.6% in July. The core PCE price index is one of the inflation measures tracked by Fed officials for the central bank's 2% target.

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August PCE price index data will be published at the end of the month, and will likely show the divergence between overall and core inflation, which was evident in the CPI report.

"There is a divergence in headline and core inflation building, where 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."