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Model S side panels await installation at Tesla's factory in Fremont, California, June 22, 2012. (NOAH BERGER/REUTERS)
Model S side panels await installation at Tesla's factory in Fremont, California, June 22, 2012. (NOAH BERGER/REUTERS)

Weak U.S. producer prices point to tame inflation pressures Add to ...

U.S. producer prices unexpectedly fell in May as costs declined broadly, indicating inflation pressures remained benign.

The Labor Department said on Friday its producer price index for final demand slipped 0.2 per cent, braking sharply from April’s 0.6 per cent increase, which was the largest gain in 1-1/2 years.

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Economists polled by Reuters had forecast producer prices rising 0.1 per cent.

The department revamped its PPI series at the start of the year to include services and construction. The series is volatile because of big swings in prices received for trade services, making it hard to get a good read on inflation.

Wholesale prices had hinted at some pick-up in inflation pressures in recent months. But Friday’s report suggested that inflation at the factory gate remained muted.

“We have seen a lot of noise in these numbers the past couple of months. This puts us back in a relative benign trend,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

The overall inflation backdrop remains generally tame, with the main gauge watched by the Federal Reserve continuing to run below the U.S. central bank’s 2 per cent target.

But with the labor market tightening, price pressures are expected to build up a bit by year end and position the Fed to make its first interest rate hike in the second half of 2015.

The Fed, which is scaling back the amount of money it is injecting into the economy through monthly bond purchases, has kept overnight lending rates near zero since December 2008. Policymakers meet next week to assess the health of the economy.

“They will probably say inflation is trending toward its 2 per cent goal but they will keep it pretty close to the vest since so much of what they might do on short-term rates would depend on what happens with second-half growth,” said Brown.

In the 12 months through May, prices received by the nation’s farms, factories and refineries rose 2.0 per cent, moderating from April’s 2.1 per cent gain.

Wholesale food prices fell 0.2 per cent after increasing for four consecutive months, while gasoline prices fell 0.9 per cent.

Prices received for services at the final demand level also fell 0.2 per cent after gaining 0.6 per cent in April.

Producer prices excluding food and energy slipped 0.1 per cent in April after advancing 0.5 per cent the prior month.

In the 12 months through May, the core PPI for final demand rose 2.0 per cent, up from the 1.9 per cent gain in the period through April.

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