Underlying U.S. producer inflation pushing higher

U.S. EconomyReuters

Investors should pay attention to inflation: Permanent Portfolio Family of Funds president

Permanent Portfolio Family of Funds President Michael Cuggino on the U.S. economy, what investors should buy amid U.S.-China trade tensions and why investors should watch inflation.

U.S. producer prices increased solidly for a second straight month in May, boosted by a surge in the cost of hotel accommodation and gains in a range of other services, pointing to a steady pickup in underlying inflation pressures.

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The report from the Labor Department on Tuesday likely supports the Federal Reserve's view that the recent weak inflation readings are probably transitory.

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Fed policymakers are scheduled to meet on June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that have led financial markets to price in at least two interest rate cuts by the end of 2019.

Fed Chairman Jerome Powell said last week that the U.S. central bank was closely monitoring the implications of the trade tensions on the economy and would "act as appropriate to sustain the expansion." A rate cut is, however, not expected next Wednesday.

Producer prices excluding food, energy and trade services rose 0.4 percent last month, matching April's gain, the government said. The so-called core PPI increased 2.3 percent in the 12 months through May after rising 2.2 percent in April.

Weaker energy and food prices, however, partially offset the increase in services last month. That led the producer price index for final demand to edge up 0.1 percent in May after gaining 0.2 percent in April. In the 12 months through May, the PPI climbed 1.8 percent, slowing from April's 2.2 percent advance.

Economists polled by Reuters had forecast the PPI would nudge up 0.1 percent in May and rise 2.0 percent on a year-on-year basis.

U.S. Treasury yields ticked up and the dollar rose to a session high against a basket of currencies after the release of the data. U.S. stock index futures were trading higher.

FOOD PRICES FALL

The services-led increase in the core PPI last month is likely to translate into a slightly higher reading for other underlying inflation measures in May. According to a Reuters survey of economists, core consumer prices probably increased 0.2 percent last month after nudging up 0.1 percent in April. The consumer price data will be published on Wednesday.

The Fed's preferred inflation measure, the core personal consumption expenditures (PCE) price index, increased 1.6 percent in the year to April after gaining 1.5 percent in March. Data for May will be released later this month.

In May, wholesale energy prices fell 1.0 percent after rising 1.8 percent in the prior month. Goods prices slipped 0.2 percent last month after gaining 0.3 percent in April.

Wholesale food prices fell 0.3 percent in May. Core goods prices were unchanged for a second straight month. Prices for hotel accommodation surged 10.1 percent in May, the most since April 2009.

That accounted for nearly 80 percent of the rise in services prices in May. Services prices rose 0.3 percent after gaining 0.1 percent in April.

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The cost of healthcare services increased 0.2 percent last month after increasing 0.3 percent in April. There were increases in the prices for both inpatient and outpatient care last month. Those healthcare costs feed into the core PCE price index.

There were also gains in prices for passenger transportation and portfolio management.

(Reporting by Lucia Mutikani Editing by Paul Simao)