WASHINGTON- US producer prices unexpectedly fell in June as rising costs for energy goods were offset by weakness in services, pointing to subdued inflation that should allow the Federal Reserve to keep pumping money into the economy to arrest a downward spiral.
Still, deflation remains unlikely as the economy battles depressed demand caused by the COVID-19 pandemic. The report from the Labor Department on Friday also showed underlying producer inflation ticked up last month.
Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices. The economy slipped into recession in February. The Fed is injecting money into the economy through extraordinary measures while the government has provided nearly $3 trillion in fiscal stimulus.
“The message for Fed officials, if they needed convincing at all, is that the worst economy since the Great Depression is keeping inflationary pressures on the back burner for now and that interest rates will need to remain at very low levels for the next few years at a minimum,” said Chris Rupkey, chief economist at MUFG in New York.
The producer price index for final demand dropped 0.2 percent last month after rebounding 0.4 percent in May. In the 12 months through June, the PPI declined 0.8 percent, matching May’s decrease.
Economists polled by Reuters had forecast the PPI would climb 0.4 percent in June and fall 0.2 percent on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices rose 0.3 percent in June. That was the biggest gain in the so-called core PPI since January and followed a 0.1 percent rise in May. In the 12 months through June, the core PPI edged down 0.1 percent. The core PPI dropped 0.4 percent on a year-on-year basis in May, which was the largest annual decrease since the introduction of the series in August 2013.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 percent inflation target. The core PCE price index increased 1.0 percent on a year-on-year basis in May, the smallest advance since December 2010. June’s core PCE price index data will be released at the end of this month.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.
With a record 33 million people on unemployment benefits, inflation is likely to remain soft.
Though businesses have reopened after shuttering in mid-March to slow the spread of COVID-19, new cases of the respiratory illness have surged in large parts of the country, causing uncertainty and curtailing domestic demand. Overseas demand has also tanked.
Gross domestic product is expected to have declined in the second quarter at its steepest pace since the Great Depression.
“COVID caused global demand to collapse, which is ultimately deflationary, but it also caused all kinds of supply disruptions, which are momentarily inflationary,” said Chris Low, chief economist at FHN Financial in New York. “The result is generally falling prices amidst a great deal more price volatility than has become the norm in the past decade. Both were on display in this morning’s PPI”.
In June, wholesale food prices decreased 5.2 percent after surging 6.0 percent in May. Wholesale energy prices shot up 7.7 percent in June after rebounding 4.5 percent in the prior month. Gasoline prices rose 26.3 percent after accelerating 43.9 percent in May.
Goods prices gained 0.2 percent last month after jumping 1.6 percent in May.
Excluding food and energy, goods prices inched up 0.1 percent last month after being unchanged in May.
The cost of services dropped 0.3 percent in June after falling 0.2 percent in the prior month. Services were weighed down by a 1.8 percent plunge in margins for final demand trade services, which measure changes in margins received by wholesalers and retailers.
A 7.3 percent drop in margins for machinery and vehicle wholesaling accounted for 80 percent of the decline in services last month. There were also decreases in the prices for apparel, jewelry, footwear and accessories.
But prices for hospital inpatient care jumped 0.8 percent after rising 0.4 percent in May.
The cost of healthcare services gained 0.2 percent after increasing 0.5 percent in May. Portfolio management fees advanced 2.2 percent. That followed a 3.9 percent rebound in May. Those healthcare and portfolio management costs feed into the core PCE price index.