The Economy

Producer Prices Drop for 1st Time Since March

The 0.4% decline suggests inflationary pressures remain muted, possibly dampening prospects for an interest rate hike next month.
Matthew HellerAugust 15, 2016

Prices paid by U.S. businesses for goods and services fell in July, the first decline since March and a possible indication that inflation pressures remain muted going into the second half of the year.

The Labor Department’s producer price index dropped a seasonally adjusted 0.4% last month, following a 0.5% increase in June. Economists polled by Reuters had forecast the PPI edging up 0.1% in July.

“Producer prices had been picking up steam over the prior three months, largely thanks to firming energy prices,” The Wall Street Journal said. “But oil prices fell in July and retail margins slid, dragging down the indexes for both goods and services.”

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Excluding the volatile food and energy categories, so-called core prices were down 0.3%. Over the past year, producer prices are down 0.2%, and core producer prices have risen just 0.7%.

The U.S. Federal Reserve has set a target of 2% inflation as it considers further easing of monetary policy. But the WSJ said the latest PPI numbers provide “scant assurance for Federal Reserve officials looking for signs of inflation pressures as they weigh their first rate increase of the year amid mixed signals from the economy.

“The Fed members are afraid to come out from under their rocks until growth is sustainably solid and inflation in near or at their target, and today’s reports don’t provide them with any comfort that will happen soon,” Joel Naroff, chief economist at Naroff Economic Advisors, said.

Producer prices for goods fell 0.4% in July, with energy prices dropping 1% after jumping 4.1% in June. Prices for services fell 0.3%, led by a steep 6% decline in margins for apparel and accessories retailing.

The July report was “much weaker than expected,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, told the WSJ. “The core data are not showing any significant acceleration or deceleration.”

Other measures of inflation such as the consumer-price index and the price index for personal-consumption expenditures rose in recent months, reflecting the increase in oil prices from roughly $30 a barrel in the early months of the year to highs above $50 a barrel in June.

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