Core U.S. Producer Prices Fall Most in More Than Four Years

(Bloomberg) --

A measure of underlying U.S. producer prices posted the biggest monthly drop in more than four years, adding to signs of tame inflation pressures that potentially offer Federal Reserve policy makers more leeway to lower interest rates. The dollar fell.

Excluding food and energy, producer prices decreased 0.3% in September from the prior month, compared with forecasts for a 0.2% increase, a Labor Department report showed Tuesday. The gauge was up 2% from a year earlier, the smallest gain in two years. The overall producer-price index also dropped 0.3% from August and was up 1.4% from a year earlier, the least since November 2016.

Key Insights

• The biggest monthly drop in the core PPI since February 2015 suggests weaker demand is forcing companies to lower prices and preventing them from passing along any higher costs resulting from tariffs. Subdued inflation, at the producer and consumer levels, provides space for the Fed to lower borrowing costs with little concern that price gains will surpass the central bank’s goal. Policy makers next meet Oct. 29-30.
• The report, which measures wholesale and other business selling costs, reflected monthly declines in indexes for machinery and vehicle wholesaling, as well as fuels and apparel retailing. Transportation and warehousing prices also dropped, while the index for hospital outpatient care increased.
• The U.S.-China trade war intensified in September when a new 15% tariff on about $112 billion of Chinese products took effect. This tranche, along with the batch that will impact about $160 billion worth of goods in December, more directly targets American consumers.
• Analysts monitor this report to assess potential price pressures set to show up at the consumer level. A more closely-watched measure of inflation, the core consumer price index, is estimated to have risen 2.4% from a year earlier in data released Thursday, which would equal the August reading.

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• Producer prices excluding food, energy, and trade services -- a measure preferred by some economists because it strips out the most volatile components -- were unchanged from the prior month, and rose 1.7% from a year earlier.
• The cost of goods fell 0.4% after dropping 0.5% the previous month. Services prices decreased 0.2% after a 0.3% gain in August.
• Energy prices fell 2.5% from the prior month, dragging down the overall gauge, and food costs rose 0.3%.

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