By Lucia Mutikani
WASHINGTON, Aug 13 (Reuters) – U.S. producer prices were unchanged in July as goods prices fell and the cost of services increased marginally, bolstering financial market expectations that the Federal Reserve could keep interest rates unchanged next month.
The report from the Labor Department on Thursday followed news on Wednesday of mild consumer inflation last month. The data led economists to also expect moderate readings in the Personal Consumption Expenditures price indexes in July.
The U.S. central bank tracks the PCE inflation measures for its 2% target. Financial markets had been pricing in a rate hike, but the odds have diminished considerably following last week’s employment report showing unexpected job losses in July.
“The absence of spillovers from higher energy prices into services prices, together with a fragile labor market, should ensure that the Fed keeps policy unchanged for the remainder of the year,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
The flat reading in the Producer Price Index for final demand last month followed a revised 0.1% drop in June, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI rebounding 0.2% following a previously reported 0.3% decline in June.
In the 12 months through July, the PPI increased 4.7% after advancing 5.5% in June. Most of the PPI data are collected early in the month, meaning that sharp oil price increases toward the end of July were probably not reflected in the PPI. As such, economists expected higher PPI readings in August, and some saw a rate hike this year as still on the table.
Goods prices dropped 0.7% after sliding 1.4% in June. Energy prices decreased 3.1%, with wholesale gasoline prices falling 5.7%. Food prices declined 0.9%. Excluding the volatile food and energy components, goods prices rose 0.1%.
The cost of services increased 0.2% after climbing 0.5%. They were lifted by a 6.5% jump in portfolio management fees, reflecting a stock market rally. That was partially offset by a 3.4% decrease in airline fares. Hospital outpatient prices increased 0.9%. Hotel and motel room prices fell 0.2%.
These are among the components that go into the calculation of the PCE inflation measures. Economists estimated that the PCE price index excluding food and energy components rose 0.2% in July after gaining 0.1% in June.
MODERATE CORE PCE INFLATION ANTICIPATED
The so-called core PCE inflation was forecast advancing 3.3% year-on-year, matching June’s rise.
Financial markets were pricing in a roughly 67.6% chance of the Fed keeping its benchmark overnight interest rate in the 3.50%-3.75% range at its September 15-16 policy meeting, CME’s FedWatch Tool showed.
The odds of a rate hike were at 32.4% down from 40.6% on Wednesday and 55% a week ago. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
Despite last month’s job losses, the labor market appears to be stable, with no sign of a rise in layoffs. Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 209,000 for the week ended August 8, the Labor Department said in a separate report.
Economists had forecast 202,000 claims for the latest week. Job growth has a tendency to slow during summer, a phenomenon that economists attributed to difficulties adjusting the data for seasonal fluctuations related to the timing of the end of the school year.
Labor market stability was also evident in an NFIB survey this week, which showed a measure of small business employment rebounded in July after four straight monthly declines.
The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, fell 22,000 to a seasonally adjusted 1.777 million during the week ended August 1, the claims report showed.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
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