January 15, 2020 / 1:50 PM / a month ago

U.S. producer prices nudge up as inflation remains benign

WASHINGTON (Reuters) - U.S. producer prices edged up in December as a rise in the cost of goods was offset by weakness in services, the latest indication of tame inflation pressures that could allow the Federal Reserve to keep interest rates unchanged this year.

FILE PHOTO: A production line employee works at the AMES Companies shovel manufacturing factory in Camp Hill, Pennsylvania, U.S. on June 29, 2017. REUTERS/Tim Aeppel/File Photo

The report from the Labor Department on Wednesday came in the wake of data on Tuesday showing a small rise in consumer prices in December. Inflation has remained tame even as the unemployment rate has dropped to near a 50-year low and the longest economic expansion on record entered its 11th year.

“There is still little sign of any significant rise in price pressures at the start of the inflation pipeline, underlining our view that the Fed will keep interest rates on hold for the foreseeable future,” said Andrew Hunter, a senior U.S. economist at Capital Economics in London.

The producer price index for final demand ticked up 0.1% last month after being unchanged in November, the government said. In the 12 months through December, the PPI increased 1.3% after gaining 1.1% in November.

For all of 2019, the PPI rose 1.3%. That was the smallest gain since 2015 and followed a 2.6% increase in 2018.

Economists polled by Reuters had forecast the PPI climbing 0.2% in December and advancing 1.3% on a year-on-year basis.

Excluding the volatile food, energy and trade services components, producer prices also nudged up 0.1% in December after being unchanged in November. The so-called core PPI rose 1.5% in the 12 months through December after gaining 1.3% in November. Core PPI increased 1.5% in 2019, also the smallest advance since 2015, after rising 2.8% in 2018.

The Fed, which has a 2% annual inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6% on a year-on-year basis in November, and undershot the Fed’s target in the first 11 months of 2019. December PCE price data will be published later this month.

The U.S. central bank last month left interest rates steady and signaled monetary policy could remain on hold at least through this year after it reduced borrowing costs three times in 2019. Inflation could remain tame, with the government reporting last Friday that the annual increase in wage growth retreated to below 3.0% in December even as the unemployment rate held at 3.5% and a broader measure of labor market slack dropped to a record 6.7%.

Inflation has been muted despite the United States imposing tariffs on billions of dollars worth of imported Chinese goods. President Donald Trump and Chinese Vice Premier Liu He signed an initial trade deal on Wednesday, a first step toward defusing an 18-month trade war.

LETHARGIC MANUFACTURING

Washington suspended some tariffs that had been due to go into effect and halved others. U.S. duties remain in effect on $360 billion of Chinese imports, about two thirds of the total.

The trade war has hurt business confidence, pushing manufacturing into recession. Despite the easing in trade tensions, business sentiment has remained subdued.

In a separate report on Wednesday, the New York Fed said its business conditions index rose to a reading of 4.8 in January from 3.3 in December. It said measures assessing the business outlook over the next six months “suggested that optimism about future conditions remained restrained.”

While a third report from the Fed showed the economy “continued to expand modestly in the final six weeks of 2019,” the central bank said manufacturing activity was “essentially flat” in most of the 12 districts. The Fed also noted that “tariffs and trade uncertainty continued to weigh on some businesses” in many districts.

“We believe manufacturing activity will remain lethargic this year,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “While the U.S. and China signed the ‘Phase One’ trade deal today, we believe a resolution to key outstanding disagreements will remain unresolved.”

The dollar slipped against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street were trading higher, with the S&P 500 .SPX near an all-time high.

In December, wholesale energy prices jumped 1.5% after increasing 0.6% in November. They were boosted by a 3.7% acceleration in gasoline prices, which followed a 2.3% rise in November. Goods prices rose 0.3% last month, matching November’s rise. Gasoline accounted for more than 60% of the increase in goods prices last month. Wholesale food prices fell 0.2% after surging 1.1% in November. Core goods prices ticked up 0.1% last month. They increased 0.2% in November.

“There is no evidence that tariffs provided manufacturers with the cover to raise prices,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.

The cost of services was unchanged in December after dropping 0.3% in November. Prices for healthcare services fell 0.1% in December after slipping 0.2% in the prior month. The weakness in wholesale healthcare costs is in stark contrast with strong readings in December’s consumer inflation report.

Portfolio management fees jumped 1.9% after rebounding 1.2% in November. Those healthcare and portfolio management costs feed into the core PCE price index. Economists expect the core PCE price index rose 0.2% in December, though the year-on-year increase probably held steady at 1.6%.

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tom Brown

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