US Producer Prices Rise Less Than Forecast, Dragged By Services

(Bloomberg) -- US producer prices rose in July by less than forecast, reflecting the first decline in services costs this year amid an ongoing moderation in inflationary pressures.

The producer price index for final demand increased 0.1% from a month earlier, according to a Bureau of Labor Statistics report released Tuesday. The median forecast in a Bloomberg survey of economists called for a 0.2% gain. Compared with a year ago, the PPI rose 2.2%.

The PPI excluding the volatile food and energy categories was unchanged in July from the prior month, the tamest reading in four months. The core PPI rose 2.4% from a year ago.

The wholesale inflation numbers precede the more closely watched consumer price index, which is expected to show a modest increase in data due Wednesday. Against a backdrop of dissipating inflationary pressures, weak July jobs figures prompted economists to pencil in a series of Federal Reserve interest-rate cuts beginning next month.

Stock-index futures and Treasuries rose after the report. Traders pushed up odds of a half-point rate cut in September.

The PPI report showed services costs decreased 0.2%, reflecting lower margins at machinery and vehicle wholesalers. Prices of goods climbed 0.6%, the most since February and led by a pickup in food and gasoline costs.

Stripping out food, energy and trade, a less-volatile measure favored by many economists, prices increased 0.3%, the most in three months. Compared with a year ago, the gauge rose 3.3%.

Fed's Measure

Categories in the PPI report that are used to calculate the Fed's preferred inflation measure — the personal consumption expenditures price index — were generally tame.

Among those categories, physician care costs and airfares declined, while the cost of hospital outpatient care was flat. Prices for portfolio management services increased 2.3%. The July PCE price gauge is due later this month.

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, rose 0.7% from a month earlier — the most since February and led by higher diesel costs.

The weakness in final demand services reflected a reversal in margins during the month after a large increase in June. Excluding trade services, wholesale prices climbed 0.3%.

--With assistance from Chris Middleton, Augusta Saraiva and Michael Mackenzie.

(Adds intermediate demand prices, graphic)

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