By Lucia Mutikani
WASHINGTON (Reuters) -U.S. producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, further evidence that the economy had entered a period of disinflation even as the labor market remains tight.
The report from the Labor Department on Thursday followed on the heels of news on Wednesday that consumer prices rose slightly in June. The run of softer inflation readings likely will push the Federal Reserve closer to ending its fastest monetary policy tightening campaign since the 1980s.
The U.S. central bank is expected to raise interest rates later this month after holding them steady at a meeting in June.
“It’ll be ‘one and done’ for the Fed with the final rate hike in its historical tightening cycle coming at the July meeting,” said Gregory Daco, chief economist at EY-Parthenon in New York.
The producer price index for final demand nudged up 0.1% last month. Data for May was revised to show the PPI falling 0.4% instead of the previously reported 0.3%.
In the 12 months through June, the PPI gained 0.1%. That was the smallest year-on-year rise since August 2020 and followed a 0.9% increase in May.
Economists polled by Reuters had forecast the PPI would rebound 0.2% on the month and advance 0.4% on a year-on-year basis.
Inflation is easing as supply chain bottlenecks disappear and demand for goods slows in response to higher interest rates. Last year’s surge in prices is also dropping out of the calculation of annual inflation rates.
The Fed has raised its policy rate by 500 basis points since March 2022. Financial markets have priced in a 25-basis-point rate increase at the central bank’s July 25-26 policy meeting, according to CME’s FedWatch tool.
A 0.2% increase in the prices of services accounted for the rise in the monthly PPI last month. That reflected a 5.4% surge in deposit services. There were also increases in the cost of food and alcohol retailing as well as hotel and motel accommodation, insurance, hospital inpatient care and airline tickets.
But the cost of transporting freight by road fell 2.1%. Services had increased 0.2% in May.
Goods prices were unchanged in June after dropping 1.6% in May. Energy prices rebounded 0.7% while the cost of food fell for a third straight month. Goods prices dropped 4.4% on a year-on-year basis. Factory goods deflation and declining freight costs suggested that the economy was slowing, potentially removing the need for the Fed to raise rates beyond this month.
“This is another positive report for investors desperate to see inflation dissipate,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.
U.S. stocks were trading higher while the dollar was lower against a basket of currencies. U.S. Treasury prices rose.
CORE PPI SLOWING
Excluding the volatile food and energy components, the so-called core goods prices fell 0.2% last month after climbing 0.1% in May.
The narrower measure of core PPI, which strips out food, energy and trade services components, edged up 0.1% after being unchanged in May. In the 12 months through June, the core PPI advanced 2.6 after increasing 2.8% in May.
While inflation is slowing, the labor market remains tight. A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 237,000 for the week ended July 8.
Claims, relative to the size of the labor market, are well below the 280,000 level that economists say would signal a significant slowdown in job growth.
Economists had forecast 250,000 claims for the latest week.
The data included the July 4 Independence Day holiday, which could have caused some distortions. Automakers also normally idle plants in July to retool for new models. But those temporary plant closures do not always happen around the same time, which could throw off the model that the government uses to strip out seasonal fluctuations from the data.
The Fed’s “Beige Book” report on Wednesday described demand for labor as having “remained healthy” in June, with pockets of worker shortages in health care, transportation and hospitality as well as high-skilled positions. But it also noted that “some contacts reported that hiring was getting more targeted and selective.”
Nevertheless, the labor market is slowing, but not falling apart, as the impact of the Fed’s rate hikes spreads across the economy. Job growth in June was the weakest in 2-1/2 years.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 11,000 to a still-low 1.729 million during the week ending July 1, the claims report showed. The still-historically low level of claims suggests some laid-off workers are experiencing shorter spells of unemployment.
“The claims data are not yet showing a weakening in demand for workers, with layoffs persisting at low levels,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
