By Lucia Mutikani
WASHINGTON, Sept 10 (Reuters) - U.S. producer prices increased in August amid higher costs of goods, airline fares and hospital services, boosting the chances of an interest rate hike from the Federal Reserve next week.
The report from the Labor Department on Thursday followed news last week of a sharp acceleration in job growth in August. Airline fares and hospital services are among the components that go into the calculation of the Personal Consumption Expenditures Price Indexes,
the inflation measures tracked by the U.S. central bank for its 2% inflation target.
August's Consumer Price Index data on Friday could shed more light on the inflation picture and further shape interest rate expectations for next week.
"This report points to cost increases in the pipeline and will support the case of those on the Committee who want to hike rates now," said Carl Weinberg, chief economist at High Frequency Economics.
The Producer Price Index for final demand rose 0.4% last month after an upwardly revised 0.1% gain in July, the Labor Department's Bureau of Labor Statistics said. The PPI was previously reported to have been unchanged in July.
Last month's increase in producer prices was in line with economists' expectations. In the 12 months through August, the PPI advanced 5.4% after rising 4.8% in July.
Energy prices increased 4.2% over the month as renewed hostilities between the United States and Iran boosted oil prices. Energy prices had declined for two straight months. Further increases are likely, with the benchmark Brent crude oil hitting $105 a barrel on Thursday.
Diesel prices soared 24.1%, accounting for more than a third of the increase in the cost of producer goods, which accelerated 1.1%. Diesel prices are at record highs. Gasoline prices increased last month as did jet fuel.
"As the conflict with Iran drags on longer than many expected, inflation pressures are becoming increasingly entrenched, leaving investors in search of a catalyst strong enough to change the inflation narrative," said Jeffrey Roach, chief economist at LPL Financial. "At this rate, a hike in rates next week appears likely."
Wholesale food prices edged up 0.1% last month after dropping 0.9% in July. Producer goods prices rose 0.4% excluding the volatile food and energy components.
AIRLINE FARES SOAR, HOSPITAL PRICES RISE
The cost of services nudged up 0.1% after gaining 0.2% in July. Despite the muted rise, the cost of transporting goods by road jumped 2.0% and airline fares soared 4.2% after dropping 3.1% in July. The cost of hospital outpatient care climbed 0.4% while inpatient care increased 0.5%.
These components have not been impacted by the methodology changes the government is implementing in the calculation of PCE inflation. The changes, which are effective with August's PCE inflation data due later this month, will affect the volatile portfolio management and investment advice services, legal services, and computer software and accessories.
The portfolio management component will no longer be included in the PCE calculation. The PPI legal services will now be the source data for the PCE inflation instead of the CPI legal services. The producer price for data processing services and videogame software will now be combined with the CPI software and accessories component in the PCE inflation report.
Based on the PPI data, economists estimated that the increase in the so-called core PCE price index could round up to 0.3% in August. Core PCE inflation rose 0.2% in July. Financial markets raised the odds of a 25-basis-point rate hike at the Fed's September 15-16 meeting to about 70% from 62% before the PPI report, CME's FedWatch tool showed. The Fed's benchmark overnight interest rate is currently in the 3.50%-3.75% range.
Stocks on Wall Street were trading lower. The dollar advanced versus a basket of currencies. U.S. Treasury yields rose. Long-term Treasury yields have been partly boosted by uncertainty over the Fed's policy action.
Some economists saw pressure on the Fed to tighten policy mounting after the European Central Bank raised rates on Thursday. The argument for a rate hike was strengthened by a separate report from the Labor Department showing initial claims for state unemployment benefits dipped 1,000 to a seasonally adjusted 206,000 last week.
Claims have been hemmed into a narrow 189,000-212,000 range since mid-July, consistent with a labor market that is regaining its footing after hitting a speed bump from the end of spring and through much of summer.
But some economists believed the Fed would stand pat next Wednesday, citing the upcoming changes to the PCE methodology, which they expected to result in downgrades to inflation readings for the prior months. They expected PCE inflation numbers in August would be tame.
Morgan Stanley estimated core PCE inflation rising at a 2.45% annualized rate over the three months through August, slowing from a 3.12% rate in July. They forecast core PCE inflation increasing 3.17% year-on-year in August, little changed from 3.10% in July. The estimates include the effects of the annual revisions to be published at the end of the month.
Some Fed officials are focusing on the three-month change in PCE inflation.
"We think the current PCE translation is consistent with the Fed remaining on hold at the September meeting," said Michael Gapen, chief economist at Morgan Stanley. "That said, tomorrow's CPI report could materially change our PCE tracker."
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
