U.S. producer prices record biggest drop in 11 months

WASHINGTON (Reuters) – U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate hike.

Other data on Thursday showed an increase in the number of Americans filing for unemployment benefits last week. The trend in weekly jobless claims, however, remained consistent with a tightening labor market.

“Another twist of the screw tighter for this labor market but inflation is not able to gain a foothold in this economy,” said Chris Rupkey, chief economist at MUFG in New York. “The pot is on the stove boiling but no inflation steam is coming out.”

The Labor Department said its producer price index for final demand slipped 0.1 percent last month, weighed by decreasing costs for services. That was the largest decline since August 2016 and reversed June’s 0.1 percent gain.

In the 12 months through July, the PPI increased 1.9 percent after rising 2.0 percent in the year through June. Economists had forecast the PPI to tick up 0.1 percent last month and 2.2 percent from a year ago.

A key gauge of underlying producer price pressures that excludes food, energy and trade services was unchanged last month. The so-called core PPI gained 0.2 percent in June. The core PPI increased 1.9 percent in the 12 months through July after advancing 2.0 percent in June.

Though the correlation between the PPI and the consumer price index has weakened, last month’s drop in producer prices could worry Fed officials who have long argued that the moderation in inflation was temporary.

Fed Chair Janet Yellen told lawmakers last month that “some special factors” were partly responsible for the low inflation readings. Inflation, which has remained below the U.S. central bank’s 2 percent target for five years, is being watched for clues on the timing of the next interest rate increase.

The Fed is expected to announce a plan to start unwinding its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at a policymaking meeting next month.

But low inflation, characterized by sluggish wage growth, suggests the central bank could delay raising rates again until December. It has increased borrowing costs twice this year.

The government will release July’s CPI report on Friday.

FILE PHOTO: Corporate recruiters (R) gesture and shake hands as they talk with job seekers in Washington, June 11, 2013.Jonathan Ernst/File Photo

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