WASHINGTON: US producer prices increased more than expected in September amid a surge in the cost of hotel and motel accommodation, leading to the first year-on-year gain since March.
But the report from the Labor Department yesterday, which also showed a jump in the price of iron and steel scrap, did not change the view that overall inflation was cooling amid excess capacity at industries. It, however, confirmed that fears of deflation, which dominated when the Covid-19 pandemic started in the US, were misplaced.
Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices. Economists expect the Federal Reserve will keep interest rates near zero at least through next year.
“The prices of some producer prices are climbing, but factories are not back to normal yet,” said Chris Rupkey, chief economist at MUFG in New York. “Fed officials will remain cautious on the inflation outlook until producer price pressures heat up further.”
The producer price index for final demand rose 0.4 per cent last month after advancing 0.3pc in August. A 0.4pc increase in the cost of services accounted for nearly two-thirds of the gain in the PPI last month. Services increased 0.5pc in August.
In the 12 months through September, the PPI rebounded 0.4pc after falling 0.2pc in August.
Economists polled by Reuters had forecast the PPI would gain 0.2pc in September and rise 0.2pc on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices rose 0.4pc in September. The so-called core PPI had increased by 0.3pc for three straight months. In the 12 months through September, the core PPI climbed 0.7pc. The core PPI gain 0.3pc on a year-on-year basis in August.
US stocks were trading largely flat. The dollar slipped against a basket of currencies. US Treasury prices were mostly higher.
The government reported on Tuesday that consumer prices increased 0.2pc in September, with a 6.7pc jump in prices for used cars and trucks accounting for most of the gain.
Business closures to slow the spread of the coronavirus caused bottlenecks in the supply chain, pushing up prices of some goods. Though supply chain disruptions have eased, weak demand and slack in the labour market are limiting businesses’ ability to raise prices.
The Fed is now more focused on the labour market and has embraced flexible average inflation targeting, which in theory could see policymakers tolerate price increases above the US central bank’s 2pc target for a period of perhaps several years to offset years in which inflation was lodged below that goal.
The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, rose 1.6pc in the 12 months through August. September’s core PCE price index data is scheduled to be released at the end of this month.
With new coronavirus infections surging across the US and the recovery from the downturn, which started in February, showing signs of stress, inflation could remain tepid. At least 25.5 million people are on unemployment benefits.
The third straight monthly increase in services in September was driven by a 3.9pc jump in prices for hotel and motel accommodation. There were also increases in the costs of hardware, building materials and supplies. Margins for final demand trade services, which measure changes in margins received by wholesalers and retailers, increased 0.2pc.
Hospital inpatient care rebounded 0.4pc, leading to a 0.2pc rise in healthcare costs. Portfolio fees shot up 1.4pc. Prices for airline tickets rebounded 2.5pc.
Those airline tickets, healthcare and portfolio management costs feed into the core PCE price index. With the relevant CPI and PPI components in hand, economists are predicting the core PCE price index increased by between 1.6pc and 1.7pc in September.
Some, however, cautioned that used motor vehicles were a wild card. Used cars and truck prices surged in August and September, driving consumer prices in each of the two months.
Daniel Silver, an economist at JPMorgan, noted that there has been “an unusual relationship between PPI data and PCE data related to used vehicles in recent months.”