Engines assembled as they make their way through the assembly line at the General Motors (GM) manufacturing plant in Spring Hill, Tennessee, August 22, 2019.
Harrison McClary | Reuters
U.S. producer prices unexpectedly rose in August and underlying producer prices rebounded, but that data will not change financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy.
The Labor Department said its producer price index for final demand edged up 0.1% last month as a jump in the cost of services offset the largest drop in the price of goods in seven months. That followed a 0.2% gain in July.
In the 12 months through August the PPI advanced 1.8% after increasing 1.7% in July. Economists polled by Reuters had forecast the PPI would be unchanged in August and rise 1.7% on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices jumped 0.4% last month after dipping 0.1% in July, the first decline since October 2015.
The so-called core PPI climbed 1.9% in the 12 months through August after increasing 1.7% in July.
The Fed, which has a 2% annual inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.6% on a year-on-year basis in July and has undershot its target this year.
Financial markets have fully priced in a rate cut at the U.S. central bank’s Sept. 17-18 policy meeting against the backdrop of simmering trade tensions between the United States and China that have soured business confidence and tipped both U.S. and global manufacturing into recession.
U.S. tariffs on Chinese goods were this month broadened to include an array of consumer goods. There are fears the manufacturing downturn could spill over into the broader economy and derail the longest economic expansion in history, now in its 11th year. The economy is being supported by robust consumer spending via a strong labor market.
The Fed cut rates in July for the first time since 2008.
In August, wholesale energy prices fell 2.5% after rebounding 2.3% in the prior month. They were weighed down by a 6.6% drop in gasoline prices, which followed a 5.2% percent jump in July. Goods prices declined 0.5% last month, the most since January, after rising 0.4% in July.
Energy prices accounted for more than 80% of the drop in the cost of goods in August. Wholesale food prices fell 0.6% in August after gaining 0.2% in the prior month. Core goods prices were unchanged last month. They edged up 0.1% in July.
The cost of services increased 0.3% after decreasing 0.1% in July. Services were boosted by a 6.4% surge in the cost of guestroom accommodation, the largest gain since April 2009.
The cost of health-care services rose 0.2% after edging up 0.1% in July. Those healthcare costs feed into the core PCE price index.