The U.S. Department of Labor released its producer price index (PPI) for the month of July, and this measures the level of inflation that businesses are seeing from suppliers and partners they trade with.
Looking into details, a slight decline in energy prices on the month, countered a 0.2 percent sequential rise in food prices, leaving headline inflation matching core.
The 12-month CPI measure also gained a tenth of a point in July to 1.7 per cent, posting its first rise in five months after steady declines, but still well below the Fed's two percent target. Economists are forecasting a pickup in the monthly core CPI index with a gain of 0.2% in July, up from 0.1% the prior month.
Goods prices fell by 0.1% on the month, with energy down by 0.3%, and those for services by 0.2%. Prices for food at home and food away from home both grew 0.2%.
According to a TD Economics research report, inflation pressures in the U.S.is expected to build through the rest of the year; however, the process is proving slower than anticipated. New York Fed President William Dudley said Thursday that inflation should pick up and that the Fed was still on track to raise interest rates. Price indexes also moved lower for equipment wholesalers, apparel retailers and airline services.
Inflation is "weaker than the Fed would like, weaker than anyone would like, but not so weak that it calls the whole outlook into question", said Roberto Perli, partner at Cornerstone Macro LLC in Washington, and a former Fed official.
The core reading, that excludes volatile food and energy costs, did manage to match expectations by holding steady at 1.7%.
The soft inflation data will embolden Fed doves, who have been urging for a pause, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Chances are that the next few month of inflation readings may be a little higher than the unusually weak readings of recent months - in which case the Fed will still hike rates in December and bond yields may correct higher.
The Fed is tasked with achieving maximum sustainable employment and stable prices. The unemployment rate is 4.3 percent. Inflation, however, has disappointed. "What we're seeing is this reversion back to the markets we've been in since the middle part of 2014". The index for natural gas fell, while the electricity index rose and the gasoline index was unchanged. On an annual basis, CPI is expected to mirror the figure of 1.7% recorded in June.
In addition, the market is also waiting to see how shrinking the balance sheet impacts bond rates and stocks SPX, +0.13%, and how the Fed interprets that market reaction, he said.
The Labor Department will release its report on consumer prices on Friday. From a year earlier, inflation-adjusted weekly earnings were up 1.1%.