American product inflation is silent; The job market is still tight

WASHINGTON (Reuters) – U.S. producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, further evidence that the economy is entering a period of de-inflation even as the labor market remains tight.

The report from the Labor Department on Thursday followed news on Wednesday that consumer prices rose slightly in June. Continued weak inflation readings are likely to push the Federal Reserve closer to ending its fastest tightening campaign since the 1980s.

The US central bank is expected to raise interest rates later this month after holding them steady in June.

“The Fed’s expected increase at the end of the month will likely be the last of the cycle,” said Bill Adams, chief economist at Bank of Comerica in Dallas. “Things could still get worse if another shock puts fresh upward pressure on prices, but with the economy slowing and opening up a modest margin of slack in its production capacity, this appears to be less of a risk now.”

The producer price index for final demand rose 0.1% last month. The data for May was revised to show that the Producer Price Index fell by 0.4% instead of the previously reported 0.3%.

In the twelve months through June, the producer price index increased by 0.1%. This was the smallest year-over-year gain since August 2020 and followed a 0.9% increase in May.

Economists polled by Reuters had expected the producer price index to rise 0.2 percent month-on-month and advance 0.4 percent year-on-year.

Inflation declines as supply chain bottlenecks disappear and demand for goods slows in response to higher interest rates. Also, the significant rise in prices in the past year does not include the calculation of annual inflation rates.

The Fed has raised its policy rate by 500 basis points since March 2022. Financial markets priced in a 25 basis point interest rate increase at the central bank’s policy meeting on July 25-26, according to CME’s FedWatch tool.

A 0.2% rise in services prices pushed up the monthly producer price index last month. Services increased 0.2% in May. This was boosted by a 5.4% increase in deposit services, including checking and savings accounts.

There have also been increases in the retail cost of food and alcohol. Wholesale prices in hotels and motels increased 2.3%, while the cost of inpatient care in hospitals increased 0.6% and airline tickets rebounded 1.1%. But portfolio management fees fell 0.3%, falling for the second month in a row.

These services components feed into the personal consumption expenditures (PCE) price indices calculation, which are measures of inflation that the Fed tracks for its 2% target.

The cost of moving goods by road decreased 2.1% and fell 13.7% year-on-year, the most since 2010.

Commodity prices were unchanged after falling 1.6% in May. Energy prices rebounded by 0.7% while the cost of food fell for the third month in a row. Commodity prices fell 4.4% year-on-year, the largest drop since April 2020.

Shrinking factory goods and lower freight costs point to a slowing economy, which may negate the need for the Fed to raise rates beyond this month.

“This is another positive report for investors desperate to see inflation dissipate,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.

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Excluding the volatile food and energy components, so-called commodity prices fell 0.2% last month after rising 0.1% in May.

The narrower measure of the core PPI, which excludes the food, energy and trade components, rose 0.1% after remaining unchanged in May. In the 12 months through June, the core PPI increased by 2.6%. This was the smallest year-over-year gain since February 2021 and followed a 2.8% increase in May.

With CPI and PPI data in hand, economists estimated that the core PCE price index rose 0.2% in June. This would be the smallest gain since last November and would follow a 0.3% increase in May. The core PCE price index was expected to rise 4.2% year-on-year in June, the smallest rise since September 2021, after rising 4.6% in May.

While inflation is slowing, the job market remains tight. A separate report from the Labor Department showed that initial claims for state unemployment benefits fell by 12,000 to a seasonally adjusted 237,000 for the week ending July 8. Economists had expected 250,000 claims for the last week.

The data included the July 4 Independence Day holiday, which could have caused some distortions. Auto factories are usually idle in July to re-equip new models. But these temporary factory closures don’t always happen around the same time, which could throw off the model the government uses to smooth out seasonal fluctuations.

Claims, relative to the size of the job market, are well below the 280,000 level that economists say indicates a significant slowdown in job growth.

The Fed’s “Beige Book” report on Wednesday described labor demand as “remaining healthy” in June, with pockets of worker shortages in health care, transportation and hospitality as well as high-skill jobs.

But she also noted that “some contacts have reported that hiring has become more targeted and selective”.

The claims report showed that the number of people receiving benefits after an initial week from Help, an employment proxy, rose by 11,000 to 1.729 million during the week ending July 1. Historically low claims indicate that some laid-off workers quickly find new jobs.

But some economists have warned that the labor market could slow significantly by the end of the year, arguing that the contraction of factory goods combined with punitive borrowing costs points to a recession.

“The contraction in core producer prices means demand is weak, so production cuts and a loss of new orders could eventually lead to belt tightening and layoffs later in the second half of the year,” said Christopher Rupke, chief economist at FWDBONDS in New York.

(Reporting by Lucia Moticani) Editing by Chizu Nomiyama and Paul Simao

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