US producer prices unexpectedly fall

12 July, 2020 12:00 AM printer

WASHINGTON: US producer prices unexpectedly fell in June as rising costs for energy goods were offset by weakness in services, pointing to subdued inflation that should allow the Federal Reserve to keep pumping money into the economy to arrest a downward spiral.

Still, deflation remains unlikely as the economy battles depressed demand caused by the COVID-19 pandemic. The report from the Labor Department on Friday also showed underlying producer inflation ticked up last month, report agencies.

Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices. The economy slipped into recession in February. The Fed is injecting money into the economy through extraordinary measures while the government has provided nearly US$3 trillion in fiscal stimulus.

“The message for Fed officials, if they needed convincing at all, is that the worst economy since the Great Depression is keeping inflationary pressures on the back burner for now and that interest rates will need to remain at very low levels for the next few years at a minimum,” said Chris Rupkey, chief economist at MUFG in New York.

The producer price index for final demand dropped 0.2 per cent last month after rebounding 0.4 per cent in May. In the 12 months through June, the PPI declined 0.8 per cent, matching May’s decrease.

Economists polled by Reuters had forecast the PPI would climb 0.4 per cent in June and fall 0.2 per cent on a year-on-year basis.

Excluding the volatile food, energy and trade services components, producer prices rose 0.3 per cent in June. That was the biggest gain in the so-called core PPI since January and followed a 0.1 per cent rise in May.

In the 12 months through June, the core PPI edged down 0.1 per cent. The core PPI dropped 0.4 per cent on a year-on-year basis in May, which was the largest annual decrease since the introduction of the series in August 2013.

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target. The core PCE price index increased 1.0 per cent on a year-on-year basis in May, the smallest advance since December 2010. June’s core PCE price index data will be released at the end of this month.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.

With a record 33 million people on unemployment benefits, inflation is likely to remain soft. Though businesses have reopened after shuttering in mid-March to slow the spread of COVID-19, new cases of the respiratory illness have surged in large parts of the country, causing uncertainty and curtailing domestic demand. Overseas demand has also tanked.

Gross domestic product is expected to have declined in the second quarter at its steepest pace since the Great Depression.