Prices paid to U.S. businesses unexpectedly fell in August, putting pressure on the Federal Reserve to cut interest rates and undercutting claims that the Trump administration’s tariffs would cause inflation to pick up.
The producer price index for final demand declined 0.1 percent from a month earlier and July’s figure was revised down, according to a Bureau of Labor Statistics report. Compared with a year ago, the PPI is up 2.6 percent.
Economists had forecast producer prices would rise by 0.3 percent for the month and 3.3 percent over the past 12 months. The July jump in producer prices was revised down from a 0.9 percent increase to a 0.7 percent increase.
The report indicates that companies are not passing through any higher costs associated with tariffs to consumers. Instead, businesses appear to be absorbing much of the tariffs through tighter margins or passing back tariff costs to foreign producers.
Goods prices inched up 0.1 percent in the month and services prices declined by 0.2 percent. Energy prices declined by 0.4 percent for the month, led by a sharp 1.8 percent decline in natural gas utility prices. Food prices climbed 0.1 percent, as increases in beef and veal prices more than offset the decline in vegetable and egg prices.
Excluding volatile food and energy prices, so-called core producer prices also declined 0.1 percent. Goods prices excluding food and energy rose by 0.3 percent. The government said a major factor in the August increase for final demand goods was a 2.3 percent increase in the price of tobacco products.
PPI for final demand measures the prices paid to American businesses for goods and services. It includes sales to consumers, households, businesses, and foreign purchasers, a broader array of customers than is measured by the consumer price index.
Because it is focused on prices paid to U.S. businesses, the PPI index excludes prices of imported goods but includes export prices. It also excludes sales taxes. Many economists expected tariffs to show up indirectly in PPI if businesses passed on higher costs of imported components and materials to their customers. That does not appear to be happening.
The producer price index is often mistakenly called a measure of wholesale prices, a confusion that goes back to its original name as the wholesale price index. In fact, the index has never been a measure of wholesale prices and the name was changed in 1978.
The better-known consumer price index (CPI) tracks the prices U.S. consumers pay, which means it excludes export prices but includes sales taxes. The CPI also excludes prices paid by businesses, nonprofits, and government.
Trade services, a measure of the margins charged by retailers and wholesalers, fell in August by a sharp 1.7 percent. This appears to indicate that businesses are absorbing higher costs, including those from tariffs, rather than passing them on to customers.
Excluding trade services as well as food and energy, a measure sometimes called super-core PPI, prices rose 0.3 percent for the month.
The producer price report also includes a measure of intermediate demand prices, mostly business-to-business goods and services that are used to produce products sold to end-users. Processed goods for intermediate demand saw prices climb 0.4 percent. Unprocessed goods fell by 1.1 percent, led by crude oil prices dropping 2.8 percent. Intermediate services prices climbed 0.3 percent.
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