An employee walks by rolls of sheet aluminum in a storage area ahead of distribution at the Impol Seval AD Sevojno plant in Sevojno, Serbia. (Photographer: Oliver Bunic/Bloomberg)

Producer Prices in U.S. Decline for First Time in 18 Months

(Bloomberg) -- U.S. producer prices unexpectedly fell in August, the first drop in 18 months, on declines in costs for services and foods, a Labor Department report showed Wednesday in Washington.

Highlights of Producer Prices (August)

  • Producer-price index dropped 0.1% m/m (est. 0.2% rise) after no change in prior month; up 2.8% y/y, least since Feb. (est. 3.2%) after 3.3% gain
  • Excluding food and energy, core gauge fell 0.1% m/m (est. 0.2% rise); up 2.3% y/y (est. 2.7%) after 2.7%
  • PPI excluding food, energy, and trade services, a measure some economists prefer because it strips out the most volatile components, rose 2.9% y/y after 2.8% in July

Key Takeaways

The monthly decline in the PPI reflected a 0.1 percent drop in the cost of services -- more than 80 percent of which was accounted for by falling margins for machinery and equipment wholesaling, according to the report. Goods prices were unchanged, as a 0.6 percent drop in food costs offset a 0.4 percent increase in energy.

While the main PPI gauge fell, a measure of underlying producer prices rose, albeit at a slower pace. Excluding food, energy, and trade services,costs were up 0.1 percent from the previous month following a 0.3 percent increase.

Producer Prices in U.S. Decline for First Time in 18 Months

The data suggest that some inflationary pressures may be taking a breather even as most signs of economic growth remain solid. Analysts are also watching for signs of how trade tariffs and retaliatory levies are affecting companies, particularly how they are filtering through the production pipeline to other businesses and consumers.

While the figures -- which highlight wholesale and other selling prices at businesses -- tend to be less prominent than the consumer price index out Thursday, they illustrate how changes in input costs are feeding into inflation. Federal Reserve policy makers are expected to raise interest rates later this month for the third time this year, with their preferred inflation gauge above the central bank’s 2 percent target.

Economist’s View

The downshift in August is likely a blip, as the trade-services data that drove the decline tend to be “noisy,” according to Ian Shepherdson, chief economist for Pantheon Macroeconomics. “The trend isn’t turning down,” he said in a research note, even after the July core PPI also missed economist estimates. “We doubt core PPI inflation has peaked, despite the unexpected weakness of the past two months’ numbers; a sustained downward trend is even less likely.”

What Our Economists Say

The August PPI is the latest sign that inflationary pressures are easing; a similar trend should filter into consumer prices in the second half of the year. Dollar appreciation is likely to weigh heavily on price growth in goods in the second half of 2018. The magnitude of price deceleration will ultimately depend on the pace of service-price inflation, which makes up around 65% of headline PPI.

-- Yelena Shulyatyeva, Tim Mahedy and Carl Riccadonna, Bloomberg Economics

Read more for the full note from Bloomberg Economics.