WASHINGTON: US producer prices increased moderately in July, lifted by a rebound in the cost of energy products, while underlying producer inflation retreated, which could allow the Federal Reserve to cut interest rates again next month.
The benign inflation report from the Labour Department on Friday could boost expectations for a half-percentage-point cut at the Fed’s September 17-18 policy meeting. President Donald Trump on Friday urged the US central bank to lower rates by a full percentage point, saying there was “no inflation in our country.”
Financial markets have fully priced in a 25-basis-point rate cut following a recent escalation in the bitter trade war between the United States and China, which led to an inversion of the US Treasury yield curve and raised the risk of a recession. Fears about the trade war’s impact on the economic expansion, the longest on record, prompted the Fed to lower its short-term rate last week for the first time since 2008.
“Weak producer prices are a reflection of a dramatic slowdown in manufacturing due to the global trade war,” said Chris Rupkey, chief economist at MUFG in New York. “We expect a second rate cut by the Federal Reserve in September as the manufacturing sector and world economies continue to slow.”
The producer price index for final demand rose 0.2 per cent last month after nudging up 0.1 per cent in June, the government said. In the 12 months through July the PPI increased 1.7 per cent after advancing by the same margin in June. Last month’s increase in the PPI was in line with economists’ expectations.
Excluding the volatile food, energy and trade services components, producer prices edged down 0.1 per cent last month. That was the first decline since October 2015 and followed an unchanged reading in June. The so-called core PPI increased 1.7 per cent in the 12 months through July, the smallest gain since January 2017, after rising 2.1 per cent in June.
The Fed, which has a 2 per cent inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.6 per cent on a year-on-year basis in June and has undershot its target this year. Data next week is likely to show moderate gains in consumer prices in July, according to a Reuters survey of economists.
The dollar .DXY slipped against a basket of currencies, while US Treasury prices rose slightly. US stocks fell as investors grappled with fresh trade-related tensions.
US tariffs on Chinese goods so far have had a marginal impact on inflation as they have mostly been on capital goods.
That could change after Trump announced last week an additional 10 per cent tariff on $300 billion worth of Chinese imports starting September 1. The new tariffs would affect mostly consumer goods. Trump said on Friday talks continued between the two countries, but added, “I am not ready to make a deal.”

omanobserver