Producer Prices Refuse to Cooperate Toward the Fed’s 2% Inflation Target

Marco Green
October 9, 2019

The Labor Department said its producer price index for final demand fell by 0.3 percent in September after inching up by 0.1 percent in August.

A measure of underlying US 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.

Producer prices in the USA unexpectedly decreased in the month of September, according to a report released by the Labor Department on Tuesday.

The 12-month increase for the index was 1.4%, the smallest advance since November 2016, after rising 1.8% in August.

The year-over-year metric is what measures annualized inflation and that rose just 1.4% from September of 2018. Less food, energy, and trade services, prices were flat for the month and up 1.9 percent compared with a year ago. The core PCE price index rose 1.8% on a year-on-year basis in August and has undershot its target this year. Economists had been expecting a slight increase. That was shown to be the lowest annualized gain in almost three years.

USA financial markets were little moved by the producer inflation data.

Prices that businesses receive for their goods and services unexpectedly fell in September, potentially dealing a setback to the Federal Reserve's hopes of hitting its inflation target in coming quarters. Goods prices decreased 0.5 per cent in August.

Prices for goods also fell last month, declining 0.4% from August. 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.

Almost half of the drop in services was attributed to a 2.7 per cent decrease in machinery and vehicle wholesaling. There were gains in the costs of doctor visits and hospital inpatient care. Those fees and healthcare costs feed into the core PCE price index.

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