U.S. producer prices rebound in July; trend remains weak amid fragile demand

FILE PHOTO: Workers prepare boxes of free food for distribution at the Chelsea Collaborative, which distributes 6 to 7 thousand of boxes of food a week in a city hard hit by the coronavirus disease (COVID-19) outbreak, in Chelsea, Massachusetts, U.S., July 9, 2020. REUTERS/Brian Snyder

WASHINGTON (Reuters) – U.S. producer prices increased by the most in more than 1-1/2 years in July, but the overall trend in producer inflation remained subdued amid signs the economy’s recovery from the COVID-19 recession was faltering.

The jump in producer prices reported by the Labor Department on Tuesday, however, further diminished the risk of deflation, a decline in the general price level. Deflation is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices.

Overall, benign inflation should allow the Federal Reserve to maintain its extraordinarily easy monetary policy as it tries to nurse the economy back to health.

“Fed officials will see no reason to be on high alert for inflation pressures after today’s modest rebound in producer prices and there is little reason for them to temper their highly stimulative monetary policy,” said Chris Rupkey, chief economist at MUFG in New York.

The producer price index for final demand increased 0.6% last month, driven by a surge in portfolio management fees and rising costs for gasoline. That was the biggest gain since October 2018 and followed a 0.2% decline in June.

In the 12 months through July, the PPI dropped 0.4% after falling 0.8% in the 12 months through June.

Economists polled by Reuters had forecast the PPI would rise 0.3% in July and decrease 0.7% on a year-on-year basis.

Excluding the volatile food, energy and trade services components, producer prices increased 0.3% last month after a similar rise in June. In the 12 months through July, the core PPI edged up 0.1%. The core PPI ticked down 0.1% on a year-on-year basis in June.

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target. The core PCE price index rose 0.9% on a year-on-year basis in June. July’s core PCE price index data will be released later this month.

There is little scope for inflation to heat up as the economy continues to take a hit from the COVID-19 pandemic. A separate report on Tuesday showed small business confidence relapsed in July, with owners tempering their economic expectations over the next six months.

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