US producer prices rise; Fed rate cut still expected

WASHINGTON: US producer prices unexpectedly rose in August, but the overall trend in producer inflation remains tame, cementing financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy.
The Trump administration’s year-long trade war with China, which has sapped business confidence, is threatening to derail the longest economic expansion in history.
Fed Chair Jerome Powell reiterated last week that the US central bank would continue to act “as appropriate” to keep the expansion, now in its 11th year, on track. President Donald Trump on Wednesday renewed criticism of the Fed and urged policymakers to push interest rates down to zero or into negative territory.
“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” Trump tweeted. “No Inflation! A once in a lifetime opportunity that we are missing because of Boneheads.”
The Labor Department said its producer price index for final demand edged up 0.1 per cent last month as a jump in the cost of services offset the largest drop in the price of goods in seven months. The PPI gained 0.2 per cent in July. In the 12 months through August, the PPI advanced 1.8 per cent after increasing 1.7 per cent in July.
Economists polled by Reuters had forecast the PPI would be unchanged in August and rise 1.7 per cent on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices jumped 0.4 per cent last month after dipping 0.1 per cent in July, the first decline since October 2015. The so-called core PPI climbed 1.9 per cent in the 12 months through August after increasing 1.7 per cent in July.
“Underlying producer price pressures are quite modest and will not give Fed officials any confidence that there is any daylight yet in that long tunnel of stubbornly low inflation,” said Chris Rupkey, chief economist at MUFG in New York.
“We expect the soft patch for inflation and inflation expectations will allow Fed officials to give the White House the rate cuts it wants starting at next week’s meeting.”
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 1.6 per cent on a year-on-year basis in July and has undershot its target this year. — Reuters