US producer prices increase by less than expected in July

Prices received for finished goods made by US producers increased by less than expected in July, according to data from the Bureau of Labor Statistics (release).

Year-on-year, the producer price index (PPI) rose by 2.1 per cent, down from a 2.5 per cent rise the month and falling short of expectations of 2.4 per cent growth.

Compared to June 2013, PPI was flat following the previous month's 0.8 per cent rise. Analysts had expected to see 0.3 per cent growth. Downward pressures were driven primarily by a 3.9 per cent fall in electricity prices and a 0.8 per cent fall in gasoline prices.

Excluding volatile goods like food and energy, PPI rose 1.2 per cent year-on year (1.4 per cent expected, 1.7 per cent in the previous month) and 0.1 per cent month-on-month (0.2 per cent expected, as in the previous month).

Paul Dales, senior US economist at Capital Economics, said he doubts the soft growth will be enough to persuade the Federal Reserve the downward trend in core price pressures will continue and therefore hold off on the tapering of its quantitative easing programme.

More important was the weak 0.1 per cent month-on-month increase in core prices, which was the third such rise in four months. That was partly due to a 0.2 per cent month-on-month in apparel prices and a 1.1 per cent month-on-month in passenger car prices. This suggests the downward trends in clothing and motor vehicle CPI inflation (data due tomorrow) are not over yet.

Core PPI inflation fell to a 2.5-year low of 1.3 per cent, from 1.7 per cent. That had as much to do with the unusually strong 0.5 per cent month-on-month rise in core prices this time last year as the weak rise last month. Nonetheless, all of the previous fall in crude materials PPI has yet to filter through into finished goods PPI.

But since core consumer price inflation has already fallen further than the core PPI would suggest, this may not translate into yet lower core CPI inflation. As such, we still think the Fed will start tapering QE3 next month.