Underlying U.S. producer prices increased solidly for a second straight month in May, boosted by a surge in the cost of hotel accommodation and gains in portfolio management service fees.
The report from the Labor Department on Tuesday likely will support the Federal Reserve’s view that recent weak price readings are probably transitory, and that inflation will gradually move toward the U.S. central bank’s 2 percent target.
“There is no evidence of falling inflation in this report,” said John Ryding, chief economist at RDQ Economics in New York.
Producer prices excluding food, energy and trade services rose 0.4 per cent last month, matching April’s gain, the government said. The so-called core PPI increased 2.3 per cent in the 12 months through May after rising 2.2 per cent in April.
Weaker energy and food prices, however, partially offset the increase in prices of services last month. That led the producer price index for final demand to edge up 0.1 per cent in May after gaining 0.2 per cent in April. In the 12 months through May, the PPI climbed 1.8 per cent, slowing from April’s 2.2 per cent advance.
Economists polled by Reuters had forecast the PPI would nudge up 0.1 per cent in May and rise 2.0 per cent on a year-on-year basis.
Fed policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that has led financial markets to price in at least two interest rate cuts by the end of 2019.
President Donald Trump in early May slapped additional tariffs of up to 25 per cent on $200 billion of Chinese goods, prompting retaliation by Beijing. Trump on Monday threatened further duties on Chinese imports if no deal was reached when he meets Chinese President Xi Jinping at a G20 summit later this month in Japan.
A tariff on all goods from Mexico to force authorities in that country to curb migrants, mostly from Central America, from crossing the border into the United States was narrowly averted after the two nations struck an agreement late on Friday.
Fed Chairman Jerome Powell said last week that the U.S. central bank was closely monitoring the implications of the trade tensions on the economy and would “act as appropriate to sustain the expansion.” A rate cut is not expected next Wednesday. Trump on Tuesday renewed his attack on the Fed and described low inflation as “a beautiful thing.”
The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6 percent in the year to April after gaining 1.5 per cent in March. Data for May will be released later this month.
The dollar was flat against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street were trading higher.
STRONG HOTEL, PORTFOLIO FEES
The services-led increase in the core PPI last month is likely to translate into a slightly higher reading for other underlying inflation measures in May. According to a Reuters survey of economists, core consumer prices probably increased 0.2 per cent last month after nudging up 0.1 per cent in April. The consumer price data will be published on Wednesday.
Prices for hotel accommodation surged 10.1 per cent in May, the most since April 2009. That accounted for nearly 80 percent of the rise in services prices in May. Services prices rose 0.3 per cent after gaining 0.1 per cent in April.
The cost of healthcare services increased 0.2 per cent last month after increasing 0.3 per cent in April. There were increases in the prices for both inpatient and outpatient care last month. Those healthcare costs feed into the core PCE price index.
Portfolio management service fees, identified by the Fed’s Powell as one of the transitory factors restraining inflation, rose 1.8 per cent in May after surging 5.3 per cent in April. These prices, which are being supported by a rebound in the stock market, are likely to lift the core PCE price index in May. The cost of passenger transportation services also increased last month.
“We continue to expect that core PCE inflation will not fall too much further from here and should return closer towards the 2 per cent target later in the year and into 2020,” said Veronica Clark, an economist at Citigroup in New York.
Last month, wholesale energy prices fell 1.0 per cent after rising 1.8 per cent in the prior month. Goods prices slipped 0.2 per cent last month after gaining 0.3 per cent in April. Wholesale food prices fell 0.3 per cent in May, led by a 32.1 per cent tumble in the cost of eggs.
Core goods prices were unchanged for a second straight month. Upcoming data will be closely watched for the effects of the latest tariff on Chinese goods. Previous duties impacted prices for machinery, equipment and some household furniture goods.