By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices rose slightly for the second straight month in June as an acceleration in the cost of services was offset by cheaper energy goods, resulting in the smallest annual increase in producer inflation in nearly 2-1/2 years.
The report from the Labour Department on Friday also showed a slowdown in underlying producer prices last month, a sign that overall inflation could remain moderate for a while despite strong gains in prices of some consumer goods and services in June. The tepid readings also suggested that tariffs on Chinese imports were not yet having an impact on inflation.
The low inflation environment and rising risks to the economy from the trade war between the United States and China, and cooling global growth are likely to see the Federal Reserve cutting interest rates this month for the first time in a decade. Fed Chairman Jerome Powell on Wednesday told lawmakers the U.S. central bank would "act as appropriate" to protect the economy against these risks.
"We don't anticipate any significant acceleration in inflation through the remainder of this year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Therefore, the Fed can cut rates in July and then keep them unchanged through 2020."
The producer price index for final demand edged up 0.1% last month after a similar gain in May. In the 12 months through June, the PPI rose 1.7%, the smallest gain since January 2017, slowing from a 1.8% increase in May.
Economists polled by Reuters had forecast the PPI unchanged in June and increasing 1.6% on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices were unchanged in June after rising 0.4% for two straight months. The so-called core PPI increased 2.1% in the 12 months through June after advancing 2.3% in May.
The dollar was little changed against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street were trading higher, with the S&P 500 (SPX) and Dow (DJI) indexes hitting record highs on rate cut expectations.
GOODS PRICES FALL
The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.6% year-on-year in May and has undershot its target this year.
In June, wholesale energy prices fell 3.1% after slipping 1.0% in the prior month. Goods prices decreased 0.4% last month after declining 0.2% in May. A 5.0% drop in gasoline prices accounted for nearly 60% of the decline in the cost of goods last month.
Wholesale food prices rebounded 0.6% in June, driven by chicken eggs and fresh fruits and melons. Corn prices surged 19.9%, the largest rise since July 2015. But meat prices fell.
Excluding food and energy, goods prices were unchanged for the third straight month.
"The prices of core goods that companies pay to produce their products are seeing no lift from the tariffs that the Trump administration has put in place," said Chris Rupkey, chief economist at MUFG in New York. "That's not good news as it speaks volumes to the weakening demand seen in the manufacturing sector this year."
Manufacturing is struggling under the weight of trade tensions, an inventory bloat and a slowing global economy.
The cost of services increased 0.4% in June, the most since October 2018, after rising 0.3% in May. Services were boosted by an increase in margins received by wholesalers and retailers.
The cost of healthcare services rose 0.2% last month, matching May's gain. While prices for doctor visits and dental care were unchanged last month, the cost of hospital care increased a solid 0.4%.
Those healthcare costs feed into the core PCE price index. Last month's gains in wholesale healthcare prices, combined with an increase in costs at the consumer level in June, were seen offsetting a 1.8% drop in portfolio management prices.
Economists are forecasting the core PCE price index rising 0.2% in June, which would lift the annual increase to 1.7%. June's PCE price data is scheduled to be released on July 30.
"While core PCE will likely remain around this somewhat below 2% range for the next few months, favourable base effects later in the year continue to imply a return to the 2% target around the start of 2020," said Veronica Clark, an economist at Citigroup (NYSE:C) in New York.