The August report for producer prices in the U.S. came in tamer than expected as the core measure posted a 0.2% monthly gain, much slower than the 0.7% increase seen in July, while the all-items index fell 0.9% in the month, following a 1.2% increase in the prior report. Falling energy costs were the driver in the broad declines.
Ashraf Laidi, chief FX strategist at CMC Markets, said benign inflation and weak retail sales shut the door on any rate hike probabilities from the Fed, and even open the door to more easing.
"We mentioned earlier this week that the historic government takeover of Fannie/Freddie was a prelude to the Fed's moving back towards an easing bias next week. Today's economic reports marked the data confirmation for such a move," he said.
Dawn Desjardins, assistant chief economist at RBC Capital Markets, said the elevated annual pace of inflation will keep the Fed wary of rising inflationary expectations, though she expects the central bank to keep the target rate at 2% at the next meeting.
"The annual increase in the core measure stood at its highest level in 17 years and the Fed will be watching to see if these price pressures will be sustained and passed through to the consumer level," she said.
Desjardins said energy prices, which account for just over a fifth of the entire index, "alleviated some of the pressure on producer prices" with a 4.6% monthly decline. In contrast, the annual advance in energy prices was 27.4%.
Rob Carnell, chief international economist at ING Wholesale, said the PPI report was "much more benign" than the retail sales report, adding that it's great news for the bond market.
Economists were expecting core inflation to increase just 0.2% in the month, while the all-items index was predicted to decline 0.5%.
From a year ago, the core measure of producer price inflation was up 3.6%, while the annual headline rate came in at 9.6%.
Food prices, which also account for more than one-fifth of the total index, increased by 0.3% in the month.
Residential gas prices dropped 5.0% in the month, contributing to a 25.4% year-over-year gain, while gasoline prices actually fell 3.5% in the month, even as the annual increase was 43.1%.
By Patrick McGee
©CEP News Ltd. 2008