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U.S. producer prices post first drop in 1-1/2 years

Reuters  |  WASHINGTON 

By Mutikani

WASHINGTON (Reuters) - U.S. prices unexpectedly fell in August, recording their first drop in 1-1/2 years, as declines in the prices of and a range of offset an increase in the cost of products.

Despite the surprise weakness in prices reported by the Labor Department on Wednesday, overall inflation is steadily rising, driven by a tightening labor market and robust economy.

The Federal Reserve is expected to raise interest rates later this month for the third time this year.

"Inflation pressures should intensify in coming quarters," said Ryan Sweet, a at in West Chester, "The unemployment rate is low, GDP growth is above trend, wage growth is accelerating ... and fiscal policy is supportive for the economy."

The price index for final demand slipped 0.1 percent last month after being unchanged in July. August's fall in the was the first since February 2017. That further lowered the annual increase in the to 2.8 percent from 3.3 percent in July.

Economists polled by had forecast the increasing 0.2 percent in August and advancing 3.2 percent year-on-year.

A key gauge of underlying producer price pressures that excludes food, and edged up 0.1 percent last month. The so-called core PPI gained 0.3 percent in July.

In the 12 months through August, the core PPI increased 2.9 percent after rising 2.8 percent in July.

The dollar was trading lower against a basket of currencies, while prices rose. Stocks on Wall Street were mixed.


The correlation between producer and consumer prices has weakened after the government revamped the PPI basket and changed the methodology several years ago.

The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding and energy, increased 2.0 percent in July, hitting the U.S. central bank's 2 percent target for the third time this year.

Government data on Thursday is expected to show consumer prices rising 0.3 percent in August after gaining 0.2 percent in July, according to a survey of economists.

There has so far been no widespread price increases from the Trump administration's import tariffs on lumber, washing machines, solar panels, and aluminum, as well as a range of Chinese goods.

But with the trade war between the and escalating, economists believe this will change and expect the import duties to boost inflation in the coming months. continue to show increases in raw material prices amid growing strains on the

prices fell 0.6 percent in August, pulled down by sharp declines in the costs of eggs and fresh fruits and melons. Food prices, which dipped 0.1 percent in July, have now decreased for three straight months.

prices rose 0.4 percent in August, with gasoline prices surging 0.6 percent after slipping 0.1 percent in the prior month. fell 0.5 percent in July.

Overall, the cost of wholesale goods was unchanged in August after edging up 0.1 percent in July. Prices for iron and scrap fell 5.6 percent last month, the biggest drop since October 2017. Nonferrous scrap prices decreased 8.7 percent, the largest decline since January 2009.

The cost of services slipped 0.1 percent last month, led by a 0.9 percent decline in the index for trade services, which measures changes in margins received by wholesalers and retailers. Services dipped 0.1 percent in July.

Over 80 percent of the drop in the cost of services last month was attributed to margins for machines and equipment wholesaling, which fell 1.7 percent.

"Declining margins at and equipment firms suggest producers may be struggling to pass on rising input costs related to recent tariffs," said Sarah House, a at in Charlotte,

The cost of services rose 0.3 percent as a 0.5 percent drop in prices for hospital outpatient care was offset by a 0.6 percent jump in the cost of doctor visits, which was the largest gain since June 2010. There were also increases in prices of hospital inpatient and dental care.

prices ticked up 0.1 percent in July. Those costs feed into the core PCE price index.

(Reporting by Mutikani; Editing by Andrea Ricci)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Wed, September 12 2018. 22:07 IST