(Bloomberg) -- A measure of underlying U.S. producer prices unexpectedly fell in July, with the first drop since early 2017 adding to signs of muted inflation that may reinforce the case for further Federal Reserve easing.
Excluding food and energy, producer prices dropped 0.1% from the prior month, compared with projections for a 0.1% gain, a Labor Department report showed Friday. The 2.1% annual increase was the slowest in two years. The overall producer-price index rose 0.2% from June, matching projections.
Key Insights
- The report, which measures wholesale and other business selling prices, showed costs declined for guestroom rentals, loan services, physician care and truck transportation of freight. The strong dollar may also be a factor, and the data suggest businesses have had difficulty raising prices despite increasing tariffs and labor costs.
- China said earlier Friday that its own producer-price index fell 0.3% from a year earlier, the first drop in almost three years, a sign of muted inflation for factories globally.
- The U.S.-China trade war intensified in the first week of August, likely weighing on global growth in the months to come, with tariffs set to rise on a host of consumer goods from China.
- President Donald Trump has repeatedly cited low inflation and the strong dollar in his attacks on the Fed to cut interest rates more deeply. While Fed Chairman Jerome Powell signaled that last week’s quarter-point interest-rate cut marked the start of only a short round of easing, investors are betting the central bank will reduce borrowing costs several more times this year.
- Producer prices excluding food, energy, and trade services -- a measure preferred by some economists because it strips out the most volatile components -- also fell 0.1% from the prior month, the first drop since 2015. It rose 1.7% from a year earlier after climbing 2.1%.
- The cost of goods rose 0.4% after falling 0.4% the previous month. Services prices decreased 0.1% after a 0.4% gain in June.
- Energy prices jumped 2.3% from the prior month, boosting the overall gauge, and food costs rose 0.2%.
- Data on consumer prices for July, due Tuesday, will give a better sense of U.S. inflation.
©2019 Bloomberg L.P.
