In July, U.S. producers prices surprisingly dropped, notching in their largest decline in almost a year and directing to further moderation in inflation that could stall a Fed interest rate hike. Additional data on Thursday reported an advance in the amount of Americans filing for unemployment benefits last week. The trend in weekly jobless claims stayed consistent with a firming labor market.
The Labor Department reported on Thursday its producer price index for final demand dropped 0.1 percent in July, pressured by declining costs for services and energy products. That was the biggest drop since August 2016 and reversed June’s 0.1 percent increase. In the 12 months through July the PPI advanced 1.9 percent after increasing 2.0 percent in the year through June. Economists had predicted the PPI increasing 0.1 percent last month and gaining 2.2 percent from a year ago.
Despite the connection between the PPI and the consumer price index has eased, July’s decline in producer prices could raise concerns for Fed officials, who have argued that the restraint in inflation was not permanent.
Last month Fed Chair Janet Yellen told lawmakers that “some special factors” were part of the reason for the low inflation readings. Inflation, which has stayed below the U.S. central bank’s 2 percent target for five years, is being watched for signals on the timing of the next Fed interest rate hike.
The U.S. central bank is anticipated to announce a plan to start cutting its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its policy meeting in September.
Though low inflation, categorized by lagging wage growth, indicates the Fed could hold off on raising rates again until December. It has increased borrowing costs twice in 2017.
Prices of U.S. Treasuries gained following the data while the dollar .DXY trimmed gains versus a basket of currencies. U.S. stock index futures eased as investors focused on heightening tensions between the U.S. and North Korea.