US producer prices post first drop in 1-1/2 years

U.S. producer prices unexpectedly fell in August, recording their first drop in 1-1/2 years, as declines in the prices of food and a range of trade services offset an increase in the cost of energy products.

The Labor Department said on Wednesday its producer price index for final demand slipped 0.1 percent last month after being unchanged in July. August’s fall in the PPI was the first since February 2017.

In the 12 months through August, the PPI rose 2.8 percent, slowing further after July’s 3.3 percent increase.

Economists polled by Reuters had forecast the PPI 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, energy and trade services 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.

Despite the moderation in producer prices last month, overall inflation is steadily rising against the backdrop of a strong labor market and robust economy. The Trump administration’s import tariffs on lumber, washing machines, solar panels, steel and aluminum, as well as a range of Chinese goods, are also expected to push up price pressures.

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

Wholesale food prices fell 0.6 percent last month, pulled down by sharp declines in the costs of eggs and fresh fruits and melons. Food prices dipped 0.1 percent in July. Wholesale energy prices rose 0.4 percent, with gasoline prices increasing 0.6 percent after slipping 0.1 percent in the prior month.

Overall, the cost of wholesale goods was unchanged in August after edging up 0.1 percent in July.

The cost of services slipped 0.1 percent, 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

The cost of health-care services rose 0.3 percent as a 0.5 percent drop in prices for hospital outpatient care was offset by increases in hospital inpatient, dental and nursing home care. Healthcare prices ticked up 0.1 percent in July.

Those health-care costs feed into the core PCE price index.