U.S. underlying producer prices increase solidly in May

June 11, 2019

WASHINGTON (Reuters) – 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 a range of other services, pointing to a steady pickup in underlying inflation pressures.

The Labor Department said on Tuesday producer prices excluding food, energy and trade services rose 0.4% last month, matching April’s gain. The so-called core PPI increased 2.3% in the 12 months through May after rising 2.2% in April.

Weaker energy and food prices, however, partially offset the increase in services last month. That led to the producer price index for final demand to edge up 0.1% in May after gaining 0.2% in April. In the 12 months through May, the PPI climbed 1.8%, slowing from April’s 2.2% advance.

Economists polled by Reuters had forecast the PPI would nudge up 0.1% in May and rise 2.0% on a year-on-year basis.

The steady rise in underlying producer prices likely supports the Federal Reserve’s view that the weak inflation readings are probably transitory.

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% in March.

An escalation in trade tensions, slowing growth and a sharp step-down in hiring in May led financial markets to price in at least two interest rate cuts from the Fed by the end of the year.

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.” Fed policymakers are, however, expected to keep rates unchanged when they meet on June 18-19.

In May, wholesale energy prices fell 1.0% in May after rising 1.8% in the prior month. Goods prices slipped 0.2% last month after gaining 0.3% in April.

Wholesale food prices dropped 0.3% in May. Core goods prices were unchanged for a second straight month. Prices for hotel accommodation surged 10.1% in May, the most since April 2009. That accounted for nearly 80 percent of the increase in services prices last month. Services prices rose 0.3% after gaining 0.1% in April.

The cost of healthcare services increased 0.2% last month after increasing 0.3% in April. Those healthcare costs feed into the core PCE price index. There were also increases in prices for passenger transportation and portfolio management.

(Reporting by Lucia Mutikani Editing by Paul Simao)

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