US producer prices weaken

WASHINGTON, Jan 16 (Reuters): US producer prices dropped by the most in more than two years in December as the cost of energy products and trade services fell, adding to signs of tame inflation that may allow the Federal Reserve to be patient about raising interest rates this year.

Other data on Tuesday suggested manufacturing activity slowed further at the start of the year, with a measure of business confidence in New York State tumbling to more than a 1-1/2-year low in January.

Fed Chairman Jerome Powell said last week that low inflation afforded policymakers "the ability to be patient and watch patiently and carefully" while they monitored economic data and financial markets for risks to growth.

The US central bank has forecast two rate increases for 2019.

"We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy and uncertainty surrounding geopolitical events," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Labor Department said its producer price index for final demand dropped 0.2 per cent last month after edging up 0.1 per cent in November. That was the first decline since February 2017 and largest decrease since August 2016.

In the 12 months through December, the PPI increased 2.5 per cent, matching November's gain. Economists polled by Reuters had forecast the PPI would slip 0.1 per cent in December and gain 2.5 per cent on a year-on-year basis.

Wholesale energy prices tumbled 5.4 per cent in December, with gasoline falling 13.1 per cent after plunging 14.0 per cent in the prior month.

That offset a 2.6 per cent jump in wholesale food prices. Food prices increased 1.3 per cent in November.

The cost of services fell 0.1 per cent, pulled down by a 0.3 per cent drop in the index for trade services, which measures changes in margins received by wholesalers and retailers. Services increased 0.3 per cent in November.

A key gauge of underlying producer price pressures that excludes food, energy and trade services was unchanged last month. The so-called core PPI increased 0.3 per cent in November.