WASHINGTON: U.S. producer prices edged up in December as a rise in the cost of goods was offset by weakness in services, the latest indication of tame inflation pressures that could allow the Federal Reserve to keep interest rates unchanged this year.
The report from the Labor Department on Wednesday came in the wake of data on Tuesday showing a small rise in consumer prices in December. Inflation has remained tame even as the unemployment rate has dropped to near a 50-year low and the longest economic expansion on record entered its 11th year.
"There is still little sign of any significant rise in price pressures at the start of the inflation pipeline, underlining our view that the Fed will keep interest rates on hold for the foreseeable future," said Andrew Hunter, a senior U.S. economist at Capital Economics in London.
The producer price index for final demand ticked up 0.1per cent last month after being unchanged in November, the government said. In the 12 months through December, the PPI increased 1.3per cent after gaining 1.1per cent in November.
For all of 2019, the PPI rose 1.3per cent. That was the smallest gain since 2015 and followed a 2.6per cent increase in 2018.
Economists polled by Reuters had forecast the PPI climbing 0.2per cent in December and advancing 1.3per cent on a year-on-year basis.
Excluding the volatile food, energy and trade services components, producer prices also nudged up 0.1per cent in December after being unchanged in November. The so-called core PPI rose 1.5per cent in the 12 months through December after gaining 1.3per cent in November. Core PPI increased 1.5per cent in 2019, also the smallest advance since 2015, after rising 2.8per cent in 2018.
The Fed, which has a 2per cent annual inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6per cent on a year-on-year basis in November, and undershot the Fed's target in the first 11 months of 2019. December PCE price data will be published later this month.
The U.S. central bank last month left interest rates steady and signaled monetary policy could remain on hold at least through this year after it reduced borrowing costs three times in 2019. Inflation could remain tame, with the government reporting last Friday that the annual increase in wage growth retreated to below 3.0per cent in December even as the unemployment rate held at 3.5per cent and a broader measure of labor market slack dropped to a record 6.7per cent.
Inflation has been muted despite the United States imposing tariffs on billions of dollars worth of imported Chinese goods. President Donald Trump and Chinese Vice Premier Liu He signed an initial trade deal on Wednesday, a first step toward defusing an 18-month trade war.
Washington suspended some tariffs that had been due to go into effect and halved others. U.S. duties remain in effect on US$360 billion of Chinese imports, about two thirds of the total.
The trade war has hurt business confidence, pushing manufacturing into recession. Despite the easing in trade tensions, business sentiment has remained subdued.
In a separate report on Wednesday, the New York Fed said its business conditions index rose to a reading of 4.8 in January from 3.3 in December. It said measures assessing the business outlook over the next six months "suggested that optimism about future conditions remained restrained."
While a third report from the Fed showed the economy "continued to expand modestly in the final six weeks of 2019," the central bank said manufacturing activity was "essentially flat" in most of the 12 districts. The Fed also noted that "tariffs and trade uncertainty continued to weigh on some businesses" in many districts.
"We believe manufacturing activity will remain lethargic this year," said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. "While the U.S. and China signed the 'Phase One' trade deal today, we believe a resolution to key outstanding disagreements will remain unresolved."
The dollar slipped against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street were trading higher, with the S&P 500 near an all-time high.
In December, wholesale energy prices jumped 1.5per cent after increasing 0.6per cent in November. They were boosted by a 3.7per cent acceleration in gasoline prices, which followed a 2.3per cent rise in November. Goods prices rose 0.3per cent last month, matching November's rise. Gasoline accounted for more than 60per cent of the increase in goods prices last month. Wholesale food prices fell 0.2per cent after surging 1.1per cent in November. Core goods prices ticked up 0.1per cent last month. They increased 0.2per cent in November.
"There is no evidence that tariffs provided manufacturers with the cover to raise prices," said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
The cost of services was unchanged in December after dropping 0.3per cent in November. Prices for healthcare services fell 0.1per cent in December after slipping 0.2per cent in the prior month. The weakness in wholesale healthcare costs is in stark contrast with strong readings in December's consumer inflation report.
Portfolio management fees jumped 1.9per cent after rebounding 1.2per cent in November. Those healthcare and portfolio management costs feed into the core PCE price index. Economists expect the core PCE price index rose 0.2per cent in December, though the year-on-year increase probably held steady at 1.6per cent.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tom Brown)