US producer prices unexpectedly fall; goods deflation underway

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, suggesting inflation would continue to subside and allow the Federal Reserve to start cutting interest rates this year.

The report from the Labor Department on Friday also showed prices for services were unchanged for the third straight month, another boost in the U.S. central bank’s fight against inflation. With supply chains mostly normalized after severe disruptions during the COVID-19 pandemic, services are now at the core of the inflation battle. Services inflation, partly driven by a tight labor market, is less responsive to rate hikes.

“The inflation pipeline is clearing and consumer prices will gradually get to the Fed’s 2% target,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

The producer price index for final demand dipped 0.1% last month, the Labor Department’s Bureau of Labor Statistics said. Data for November was revised to show the PPI falling 0.1% instead of being unchanged as previously reported. The PPI has now declined for three consecutive months.

Economists polled by Reuters had forecast the PPI rebounding 0.1%. Good prices dropped 0.4%, with a 12.4% decline in the cost of diesel fuel accounting for half of the decrease. Goods prices fell 0.3% in November.

Food prices slipped 0.9% last month, with the cost of eggs tumbling 20.5%, but reversing only a fraction of the 71.2% surge in November. Wholesale passenger car prices fell 3.0%. But gasoline prices increased 2.1%.

In the 12 months through December, the PPI increased 1.0% after advancing 0.8% in November.

Data on Thursday showed consumer prices increased more than expected in December, driven by solid gains in shelter and healthcare costs. Financial markets remain hopeful that the Federal Reserve will start cutting interest rates in March.

The U.S. central bank has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022.

Services prices were curbed by declines in margins for machinery and motor vehicle wholesaling. Prices for hotel and motel rooms, transporting freight by road, automobiles and parts retailing, and apparel wholesaling also fell. But portfolio management fees rebounded. Airline fares also rose.

Portfolio management fees, hotel and motel accommodation are components in the calculation of the personal consumption expenditures price indexes, the inflation measures tracked by the Fed for its inflation target.

The narrower measure of PPI, which strips out food, energy and trade services components, rose 0.2% in December after gaining 0.1% in the prior month. The so-called core PPI rose 2.5% on a year-on-year basis after increasing 2.4% in November.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)