Unexpected drop in US wholesale prices shows tame inflation

Washington - An unexpected decrease in US wholesale prices in July, the first in nearly a year, signals inflation will remain tame, a Labour Department report showed on Thursday in Washington.

Highlights of producer prices (July)

• Producer-price index  fell 0.1% (est. 0.1% gain), first drop since August 2016, after a 0.1% increase PPI rose 1.9% from a year earlier after a 2% gain in the prior 12-month period.

• Excluding food and energy, PPI also eased 0.1% from previous month and was up 1.8% from July 2016

Key takeaways

More than 80% of the July decline in producer prices was due to a 0.2% drop in costs of services, the first in five months. Most of the decrease in services inflation reflected a slump in margins at chemical wholesalers. Price indices also moved lower for equipment wholesalers, apparel retailers and airline services.

A smaller year-over-year gain in the PPI excluding food, energy, and trade services - a measure some economists prefer because it strips out the most volatile components - also indicates pricing power remains modest.

The data indicate inflationary pressure at the various stages of the production process is relatively stable, helping explain why Fed policy makers plan to raise interest rates only gradually.

US central bankers have boosted the benchmark policy rate four times since December 2015 and will again before the end of this year, according to their projections published in June.

Other details

• Excluding the volatile categories of food, energy, and trade services, producer costs were unchanged from the previous month and up 1.9% from July 2016.

• Energy commodity prices fell 0.3%, the third straight decline, while food costs were unchanged.

• Wholesale goods prices retreated 0.1% in July.

• Drop in final demand services prices reflected 0.5% decrease in trade and 0.8% fall in transportation and warehousing.

• Cost of health care service used to calculate the Commerce Department’s consumer-spending inflation index or the Fed’s preferred price measure, rose 0.3% from the prior month before adjusting for seasonal variations.

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