US Producer Price Index Unchanged in July

• The US producer price index (PPI) was unchanged in July 2013, and below market expectations for a 0.3% increase following 0.8% and 0.5% gains in June and May, respectively. The year-over-year pace of increase slowed to 2.1% from 2.5% in June.
• Energy prices slipped 0.2% lower following sizeable gains in each of the two previous months. Food prices were flat, down from a 0.2% gain in June and a 0.6% increase in May.
• Excluding both of the volatile food and energy components, the core producer price index inched up 0.1% in July following similarly modest 0.2% and 0.1% gains in June and May, respectively. • The year-over-year rate of core price growth dropped to just 1.2% after holding steady at 1.7% in each of the previous four months.
• The historically muted pace of core price growth still suggests that, despite continued job growth, remaining excess capacity in labour markets is keeping a lid on underlying inflationary pressures. We expect that economic data have been strong enough to prompt the Fed to reduce its pace of asset purchases in the coming months; however, the lack of inflationary pressure remains consistent with our view that the first hike in the federal funds rate is unlikely until mid-2015.

Producer prices were unchanged in July 2013, and below market expectations for a 0.3% increase and following sizeable 0.8% and 0.5% gains in June and May, respectively. The year-over-year rate of growth slipped to 2.1% from 2.5% in June although this still remained above a 1.7% reading in May and a recent low of 0.6% in April. Energy prices (surprisingly) dipped 0.2% in July, thereby marking the first decline in three months after sizeable 2.9% and 1.3% gains in June and May, respectively. Food prices were unchanged after a modest 0.2% gain in June.

Excluding both of the volatile food and energy components, core producer prices provided only modest offset, posting just a 0.1% gain that was below market expectations for a 0.2% increase. The year-over-year rate of growth in core prices moderated to 1.2% after holding steady at 1.7% in each of the previous four months. The July reading marks the slowest pace of annual growth in core prices since November 2010.

The annual pace of overall producer price growth remains above its level earlier this year; however, looking ahead, sharp gains in energy prices in August and September a year ago are not likely to be repeated this year, thereby suggesting that the year-over-year rate will ease further in the near term. More importantly, excluding both of the volatile food and energy components, the historically muted pace of core price growth still suggests that, despite continued job growth, remaining excess capacity in labour markets is keeping a lid on underlying inflationary pressures. We expect that economic data have been strong enough to prompt the Fed to reduce its pace of asset purchases in the coming months; however, the lack of inflationary pressure remains consistent with our view that the first hike in the federal funds rate is unlikely until mid-2015.

 

RBC

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