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An assembly line worker works on the production line at Renegade RV manufacturing plant in Bristol, Indiana. Image Credit: Reuters

WASHINGTON: US producer prices increased moderately in July, lifted by a rebound in the cost of energy products, while underlying producer inflation retreated, which could allow the Federal Reserve to cut interest rates again next month.

The Labor Department said on Friday its producer price index for final demand rose 0.2 per cent last month after nudging up 0.1 per cent in June. In the 12 months through July the PPI increased 1.7 per cent after advancing by the same margin in June.

Economists polled by Reuters had forecast the PPI would rise 0.2 per cent in July and increase 1.7 per cent on a year-on-year basis.

Excluding the volatile food, energy and trade services components, producer prices edged down 0.1 per cent last month. That was the first decline since October 2015 and followed an unchanged reading in June. The so-called core PPI increased 1.7 per cent in the 12 months through July after rising 2.1 per cent in June.

The Fed, which has a 2 per cent inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.6 per cent on a year-on-year basis in June and has undershot its target this year.

Financial markets have fully priced in a rate cut following a recent escalation in the bitter trade war between the United States and China, which led to an inversion of the US. Treasury yield curve and raised the risk of a recession.

Muted inflation could boost expectations for a half-percentage-point cut at the Fed’s September 17-18 policy meeting. Worries about the trade war’s impact on the US

economic expansion, the longest on record, prompted the US central bank to lower its short-term rate last week for the first time since 2008.

US tariffs on Chinese goods so far have had a marginal impact on inflation as they have mostly been on capital goods.

That could change after President Donald Trump announced last week an additional 10 per cent tariff on $300 billion worth of Chinese imports starting September 1. The new tariffs would affect mostly consumer goods.

In July, wholesale energy prices rebounded 2.3 per cent after falling 3.1 per cent in the prior month. They were boosted by a 5.2 per cent per cent jump in gasoline prices. Goods prices increased 0.4 per cent last month, reversing June’s 0.4 per cent decline.

Energy prices accounted for more than 80 per cent of the rebound in the cost of goods last month.

Wholesale food prices rose 0.2 per cent in July after advancing 0.6 per cent in June. Core goods prices edged up 0.1 per cent after being unchanged for three straight months.

The cost of services fell 0.1 per cent in July, the first decrease since January, after rising 0.4 per cent in June. Services were pulled down by a 4.3 per cent drop in the cost of hotel and motel rooms.

The cost of health care services edged up 0.1 per cent last month after rising 0.2 per cent in June. Those health care costs feed into the core PCE price index.