By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices increased slightly more than expected in June amid a rise in the cost of services, but that did not change expectations that the Federal Reserve could start cutting interest rates in September.
Details of the components in the producer-price report, especially healthcare services, that go into the calculation of the key inflation measures tracked by the U.S. central bank for monetary policy were mostly favorable last month.
Taken with the softer readings in the consumer price report, economists anticipated benign readings in the personal consumption expenditures (PCE) inflation in June.
"There does not appear to be much inflation pressure percolating on the factory floors that might affect the prices that consumers pay at the shops and malls," said Christopher Rupkey, chief economist at FWDBONDS.
The producer price index for final demand rose 0.2% last month after being unchanged in May, the Labor Department's Bureau of Labor Statistics said on Friday. Economists polled by Reuters had forecast the PPI nudging up 0.1%.
In the 12 months through June, the PPI increased 2.6%. That was the largest year-on-year gain since March 2023 and followed a 2.4% advance in May.
A 0.6% increase in the price of services accounted for the rise in the PPI. Services rose 0.3% in May. They were boosted by a 1.9% surge in margins for trade services, which measure changes in margins received by wholesalers and retailers, mostly reflecting a 3.7% advance in machinery and vehicle wholesaling.
But the cost of transportation and warehousing services fell 0.4%. Portfolio management fees rebounded 1.0%, not fully reversing a 0.8% drop in May. Airline fares increased 1.1%, leaving the bulk of the 3.9% decline in May intact. The cost of hotel and motel rooms slipped 0.2%. Readings were even tamer for the series used in the calculation of medical services PCE. The cost of doctor services dropped 0.4%.
"The big news is that, after applying our own seasonal adjustment, PPI hospital prices increased by only 0.1% in June and the massive 1.3% surge in May was revised down to a 0.6% gain," said Paul Ashworth, chief North America economist at Capital Economics.
Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among components that go into the calculation of the PCE price indexes, the inflation measures tracked by the Fed for its 2% target.
PCE inflation was forecast to have edged up 0.1% in June after being unchanged in May. Estimates for the core PCE price index converged around a 0.15% rise. Core inflation ticked up 0.1% in May. Both PCE and core inflation were seen increasing 2.5% year-on-year in June after rising 2.6% in May.
In light of the downward revision to PPI hospital prices, economists expected the May monthly and year-on-year inflation figures to be revised lower.
"Disinflation has gotten back on track over the last two months," said Stephen Juneau, an economist at Bank of America Securities.
Stocks on Wall Street traded higher. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.
SEPTEMBER RATE CUT EYED
In addition to subsiding inflation, the labor market is also losing steam. The unemployment rate climbed to a 2-1/2-year high of 4.1% in June. With the Fed now wary of labor-market weakness, economists and financial markets are increasingly betting on a rate cut in September, with another reduction in borrowing costs expected in December.
Fed Chair Jerome Powell acknowledged the improving inflation environment during his testimony before lawmakers this week, but also highlighted the risks to the labor market saying "we have seen considerable softening."
The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July. It has hiked its policy rate by 525 basis points since 2022.
Wholesale goods prices dropped 0.5% last month after falling 0.8% in May, showing no impact from rising shipping costs. They were depressed by decreases in the prices of energy products, with gasoline declining 5.8% after dropping 7.3% in May.
Food prices fell 0.3% after being unchanged in May. Egg prices, however, rebounded 55.9% after dropping 34.8% in May.
Excluding food and energy, goods prices were unchanged after increasing 0.2% in May. The narrower measure of PPI, which strips out food, energy and trade services components, was unchanged in June. That was the lowest reading since May 2023 and followed a 0.2% gain in May. The core PPI increased 3.1% year-on-year after rising 3.3% in May.
"The ability of businesses to pass on input costs to consumers is much more limited now than over the last few years and at best elevated input costs may just keep prices from declining more," said Veronica Clark, an economist at Citigroup.
Consumers are taking note of the moderating price pressures, though that has not lifted spirits as the upcoming presidential election raises concerns about the economy's trajectory.
The University of Michigan's preliminary reading of one-year inflation expectations dipped to 2.9% this month from 3.0% in June. Its five-year inflation outlook also fell to 2.9% from 3.0% in June.
"Together with falling actual inflation, that paves the way for interest-rate cuts beginning in September," said Michael Pearce, deputy chief U.S. economist at Oxford Economics.