US producer inflation slows in July amid signs of pricing power diminishing

US producer prices increased less than expected in July as the cost of services fell by the most in nearly 1-1/2 years amid signs of diminishing pricing power for businesses, evidence of waning inflation pressures that reinforced hopes of an interest rate cut next month.
 

The report from the Labor Department on Tuesday also showed favorable readings for most of the components that go into the calculation of the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the Federal Reserve for monetary policy. Moderating inflation should allow the US

central bank to focus more on the labor market.
 

A surge in the unemployment rate to a near three-year high of 4.3 per cent in July fanned fears in financial markets of a recession, which have been largely dismissed by economists.
 

"Producer price increases cooled this month which is good news for the Fed's inflation fight, but there is no PPI deflation, so Fed officials do not have to rush to judgment and bring rate cuts forward because the economy is headed downhill," said Christopher Rupkey, chief economist at FWDBONDS.
 

The producer price index for final demand edged up 0.1 per cent last month after rising by an unrevised 0.2 per cent in June, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.2 per cent.
 

In the 12 months through July, the PPI increased 2.2 per cent after climbing 2.7 per cent in June.
 

Services prices fell 0.2 per cent, the largest decline since March 2023, after rising 0.4 per cent in June. The fall reflected a 1.3 per cent drop in trade services, which measure changes in margins received by wholesalers and retailers, the largest decline for that category since February 2015. Trade margins rose 1.4 per cent in June.
 

Margins for machinery and vehicle wholesaling fell 4.1 per cent.
 

There were also decreases in margins for food and alcohol retailing as well as automobiles, automotive fuels and lubricants retailing, and desktop and portable device application software publishing.
 

Ebbing pricing power was also evident in the National Federation of Independent Business survey on Tuesday, which showed significant declines in the shares of small businesses raising average selling prices and planning price hikes in July.
 

"We expect gross margins to fall over the coming months as growth in consumers' spending continues to slow, but July's rapid rate of decline is unsustainable," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
 

The cost of transportation and warehousing services, however, rose 0.4 per cent. Airline fares fell 0.2 per cent after rising 0.4 per cent in June. Healthcare and medical insurance costs ticked up 0.1 per cent following a 0.2 per cent gain in the prior month.
 

The cost of physician services fell 0.2 per cent, while hospital inpatient care rose 0.2 per cent after climbing 0.4 per cent in June. Hotel and motel room prices dropped 0.4 per cent after declining 0.5 per cent in June.
 

Portfolio management fees increased 2.3 per cent, a gain that is likely to be reversed following a recent stock market sell off.
 

Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among components that go into the calculation of the PCE price indexes, the inflation measures tracked by the Fed for its 2 per cent target.
 

Economists' estimates for the July core PCE price index ranged from 0.14 per cent to 0.2 per cent based on the PPI data. These estimates could change after July's consumer price data on Wednesday. Core inflation rose 0.2 per cent in June.
 

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

RATE CUT AWAITED
 

Financial markets anticipate a 25 basis point rate cut in September, followed by similar reductions in November and December. A half-a-percentage point cut cannot be ruled out next month, but much will depend on August's employment report.
 

The Fed has maintained its benchmark overnight interest rate in the current 5.25 per cent-5.50 per cent range for a year, having raised it by 525 basis points in 2022 and 2023.
 

Goods prices rebounded 0.6 per cent in July, the largest gain in five months, after falling for two straight months. A 1.9 per cent increase in energy prices accounted for nearly 60 per cent of the rise in goods prices. Wholesale gasoline prices increased 2.8 per cent. There were also increases in the prices of diesel and jet fuel.
 

With oil prices recently declining amid expectations of softening demand in China, the rebound in energy prices is likely to be short-lived. Wholesale food prices shot up 0.6 per cent after nudging up 0.1 per cent in June. Meats, fresh fruits and melons cost more relative to the prior month.
 

Excluding the volatile food and energy components, goods prices gained 0.2 per cent after being unchanged in June.
 

The narrower measure of PPI, which strips out food, energy and trade, rose 0.3 per cent after edging up 0.1 per cent in June. The core PPI increased 3.3 per cent year-on-year after rising 3.2 per cent in June.
 

"Although the pass-through from producer into consumer prices is incomplete and of variable length, today's report is well within the range that allows the Fed to continue to place its primary focus on the labor market at upcoming policy decisions," said Michael Hanson, an economist at J.P. Morgan.