(Bloomberg) -- A measure of underlying U.S. producer prices that excludes food and fuel picked up in August after posting its smallest gain in two years, indicating inflation may be starting to stabilize.

So-called core producer prices increased 2.3% in August from a year earlier, topping the Bloomberg survey median forecast, following a 2.1% gain, a Labor Department report showed Wednesday. Including food and energy, the index rose 0.1% from July and 1.8% from August 2018.

Key Insights

  • The report, which measures wholesale and other business selling costs, is monitored by analysts to assess the potential of price pressures at the consumer level. Since the end of 2018, annual producer price gains have slowed as a sluggish global economy, exacerbated by the U.S.-China trade war, has limited demand for inputs.
  • Tame inflation, at the producer and consumer levels, gives Federal Reserve policy makers leeway to reduce their benchmark interest rate for a second time this year when they meet next week.
  • The report showed wholesale prices of goods other than food and energy were unchanged in August from a month earlier, while services for final demand climbed 0.3%, led by increases in gaming receipts, guestroom rentals and insurance.
  • The data also showed the costs of arranging freight and cargo shipments surged 4.8% from July, a record in data back to 2009 and likely reflecting the impact on supply chains from tariffs. President Donald Trump escalated the U.S.-China trade war at the beginning of August, announcing tariffs on an additional batch of Chinese goods before escalating those duties before they took effect.
  • Fed policy makers are expected to lower interest rates 25 basis points next week amid tepid inflation, ongoing trade tensions and slowing economic growth at home and abroad.

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  • Producer prices excluding food, energy, and trade services -- a measure preferred by economists because it strips out the most volatile components -- rose 0.4% from the prior month, the most since April. They climbed 1.9% from a year earlier after a 1.7% annual increase in July that was the smallest since January 2017.
  • Energy prices dropped 2.5% from the prior month, while food costs declined 0.6%, the most since January.

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--With assistance from Chris Middleton.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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