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US wholesale inflation falls in July on declining services costs

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Falling services costs drove US wholesale inflation down in July, marking the first contraction in nearly a year, the Labor Department reported Thursday.

The dip in the Producer Price Index reversed the modest gain seen in June and could further weaken the case for continued interest rate tightening by the Federal Reserve.

The central bank had been expected raise the benchmark lending rate a third time this year, but some economists are ruling that out due to persistently weak inflation.

PPI, which measures costs of wholesale goods and services, fell 0.1 percent in July, the first decline since August of last year, according to the report, confounding economists who expected a 0.2 percent increase. The decline was driven by a 0.2 percent drop in final demand services.

The PPI for the latest 12 months also shrank, falling a tenth of a point from June to 1.9 percent. The year-on-year measure has fallen six-tenths in the last three months.

Excluding the volatile food, fuel and trade categories, prices were flat for the month, compared to the expected 0.2 percent increase, while the 12-month measure dropped a tenth of a point to 1.9 percent, the third straight decline.

Much of the decrease in PPI last month was driven by services, including a record drop for services tied to chemicals and related products, which fell 5.8 percent, the largest drop in seven years.

Chris Low of FTN Financial said the report showed a “stunning array” of falling prices.

“Despite economists’ conviction inflation is about to accelerate, prices are in retreat,” he wrote in a research note. He said a weakening US dollar convinced some economists that inflation would finally kick in by July.

“Their conviction was undoubtedly struck a blow this morning as wholesale prices should be more sensitive to movement in the dollar than retail prices,” Low said.

“The drop in both headline and core PPI suggests companies are compressing margins, weak dollar or not.”

Services showed signs of weakness in areas besides chemicals wholesaling, including airline passenger services which fell 2.7 percent, the largest decrease since March.

Other declines were recorded in machinery and equipment, paper and plastics, auto parts, software publishing and portfolio management, among others.

Energy prices helped weigh down the index, with natural gas falling 2.7 percent and gasoline declining by 1.4 percent. And wholesale costs for beef and veal fell 12 percent, the largest decrease since October 1973.

Some categories did see gains, with hospital outpatient care rising 0.6 percent, diesel fuel gaining 9.8 percent, hotel accommodation adding 2.2 percent and prices for grains increasing by a sharp 17.1 percent.

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