Producer inflation falls in August, pointing to softening demand

"U.S. producer prices unexpectedly fell in August amid a compression in trade services margins and mild increase in the cost of goods, suggesting that domestic businesses were probably absorbing some of the tariffs on imports. The lack of strong producer price pressures, despite import duties, could also be signaling softening domestic demand against the backdrop of a struggling labor market. The Federal Reserve is expected to cut interest rates next Wednesday, with a quarter-percentage-point reduction fully priced in, after pausing its easing cycle in January because of uncertainty over the impact of President Donald Trump's sweeping tariffs."

""Inflation barely has a heartbeat at the producer level which shows the tariff effect is not boosting across-the-board price pressures yet," said Christopher Rupkey, chief economistat FWDBONDS. "As time goes on one has to wonder if there are slow-growth reasons and weak economic demand that is keeping inflation in check. There is almost nothing to stop an interest rate cut from coming now.""

"The Producer Price Index for final demand dipped 0.1% last month after a downwardly revised 0.7% jump in July, the Labor Department's Bureau of Labor Statistics said on Wednesday. Economists polled by Reuters had forecast the PPI would advance 0.3% after a previously reported 0.9% surge in July. A 0.2% drop in the prices of services accounted for the fall in the PPI. That followed a 0.7% rebound in July. Services were last month held down by a 1.7% decline in margins for trade services, reflecting a 3.9% decrease in margins for machinery and vehicle wholesaling."

"But the cost of services less trade, transportation and warehousing increased 0.3% while prices for transportation and warehousing services shot up 0.9%. Portfolio management fees increased 2.0%. Airline fares rose 1.0% while the cost of hotel and motel rooms increased 0.9%. Prices for dental services accelerated 0.6%. Goods prices edged up 0.1% after increasing"

Producer prices declined 0.1% in August, driven by a 0.2% drop in service prices amid weaker trade services margins and a mild 0.1% rise in goods costs. Trade services margins fell 1.7%, linked to a 3.9% decrease in machinery and vehicle wholesaling margins. Services excluding trade, transportation and warehousing rose 0.3%, while transportation and warehousing services increased 0.9%. Specific service categories saw gains: portfolio management fees +2.0%, airline fares +1.0%, hotel and motel rooms +0.9%, dental services +0.6%. The muted producer inflation suggests firms may be absorbing tariffs and domestic demand appears soft, supporting expectations of a near-term Federal Reserve rate cut.

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