Home Markets Interest Rate Cuts Now Possible Due to Low US Producer Inflation

Interest Rate Cuts Now Possible Due to Low US Producer Inflation


The price for U.S. producers increased at a moderate amount last July because of energy products costs. The producer inflation is significantly low, which means that the Federal Reserve can tackle interest rate cuts in August.

The Labor Department reported that there was only benign inflation as of Friday. The report invites expectations on a possible .5 point cut discussion during the policy meeting of the Federal Reserve, which will take place on September 17 and 18. U.S. President Donald Trump, on the other hand, wants the central bank to bring down interest rates by a full one percent. Trump reveals his desire for the country to avoid inflation.

Financial markets continue to use a 25-point rate cut as the basis for interest, mostly because of the resuming trade war between China and the United States. The trade war exposes the U.S. economy to the risk of going into recession. To avoid it from happening, the U.S. Treasury undergoes an inversion. The trade war continues to strike the fear of economic growth and expansion. The Federal Reserve lowered short-term rates because of the development, which is the first time in over a decade.

MUFG Union Bank Chief Financial Economist Chris Rupkey states that global trade war is drastically slowing down manufacturing and production. The impact resulted in weak producer prices. Rupkey expects that the Federal Reserve will hand out a second rate cut if the trade war continues to escalate. The manufacturing industry and the global economy will continue to suffer as long as the two powerhouse countries remain at odds.

Final demand’s producer price index went up by 0.2% in July, which is an increase from June’s 0.1%. The government revealed that the past year saw a total of 1.7% increase for the producer price index. Economists correctly predicted the rise of PPI in the last month. Producer prices decline by 0.1% in June when not accounting for the energy and trade services and food industries, which are volatile sectors. The dip in producer prices was the first-ever since October 2015. In the 12 months that saw an increase of 1.7% in PPI, July had the smallest gain despite rising by 2.1% the previous month.

The Federal Reserve has target inflation of 2%. The Fed plans to reach the target by tracking the price index for the personal consumption expenditures for monetary policy. The core PCE price index has a year-on-year 1.6% increase basis every June. Because of the lowered interest rates, economists expect to see moderate gains in July’s consumer prices.

The dollar saw a decline against other currencies, while prices of the U.S. Treasury witnessed a slight increase. Trade tensions between China and the United States continue to affect stocks, directly affecting investors’ decisions.


Situations around the Market

The United States’ implementation of tariffs on Chinese imports made narrow impacts on inflation because most of the taxed products are capital goods. Trump plans to increase tariffs by 10% on Chinese goods worth over $300 billion. The implementation begins on September 1, which will mostly affect consumer goods. Trump also states that the U.S. continues to have negotiation talks with China, but the two countries are still not close to settling for a deal.

Capital Economics U.S. Economist Andrew Hunter, who resides in London, reveals that the next series of tariffs will have more impact on the prices of finished goods. The section of Chinese imports has fewer alternatives, which means that they have to cover the more significant share of consumer goods. However, Hunter states that it will depend if China will risk a dip in their currency. For the first time in a long decade, China’s main currency, the Yuan, went over 7 dollars.

U.S. wholesale energy prices managed to rise 2.3% in July after its decline to 3.1% the previous month. The 5.2% increase in gasoline prices helped boost wholesale energy. Meanwhile, goods prices made a 0.4% increase in July after a mirrored decline last June.

The rise in energy prices accounts for over 80% of the cost of goods’ increase last month. Wholesale food prices went up by 0.2% in July following June’s 0.6% rise. Core goods prices, meanwhile, bumped up by 0.1% after remaining steady for three consecutive months.

While most prices are going up, services costs are falling. The value for services declines by 0.1% in July, its first dip since the start of the year. Services also witnessed a massive drop in prices of the motel and hotel rooms by 4.3%.

Healthcare services managed to increase by 0.1%, which is still a dip from June’s 0.2%. Doctor visits costs also dropped by 0.5%, which is the highest decline in two years. Hospital inpatient care prices fell by 0.2%, but outpatient care surged high with a 0.7% increase.

JP Morgan Economist Daniel Silver reveals that the PPI presented a possible decline on medical care PCE price index in July.