By Lucia Mutikani
WASHINGTON (Reuters) - U.S. 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 U.S. 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 percent last month after edging up 0.1 percent 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 percent, matching November's gain. Economists polled by Reuters had forecast the PPI would slip 0.1 percent in December and gain 2.5 percent on a year-on-year basis.
Wholesale energy prices tumbled 5.4 percent in December, with gasoline falling 13.1 percent after plunging 14.0 percent in the prior month. That offset a 2.6 percent jump in wholesale food prices. Food prices increased 1.3 percent in November.
The cost of services fell 0.1 percent, pulled down by a 0.3 percent drop in the index for trade services, which measures changes in margins received by wholesalers and retailers. Services increased 0.3 percent 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 percent in November. In the 12 months through December, the core PPI increased 2.8 percent following a similar rise in November.
Data last week showed the consumer price index falling 0.1 percent in December, the first drop in nine months, amid cheaper gasoline, airline fares, used trucks and motor vehicles as well as motor vehicle insurance. The CPI was unchanged in November.
Inflation remains tame despite a tightening labor market that is starting to push up wage growth. The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, is hovering just below the U.S. central bank's 2 percent target.
U.S. financial markets were little moved by the producer price inflation data. The dollar rose against the euro after data showing German's economy slowed in 2018 underscored worries about a broader slump in Europe. Prices of longer-dated U.S. Treasuries fell, while stocks on Wall Street were trading higher.
SHUTDOWN HURTING SENTIMENT
The core PCE price index increased 1.9 percent on a year-on-year basis in November after rising 1.8 percent in October. It hit 2 percent in March for the first time since April 2012.
The cost of wholesale healthcare services, which feed into the core PCE price index, increased 0.2 percent in December after gaining 0.1 percent in November.
Core PCE data for December is scheduled for release later this month, but it is likely to be delayed because of the ongoing partial shutdown of the federal government.
The shutdown, now the longest in U.S. history, has delayed the release of data from the Bureau of Economic Analysis and Census Bureau, including November trade figures as well as December retail sales and housing starts reports.
The incomplete data is making it difficult to get a good read on the economy, and analysts have said that could complicate policy decisions.
Economists also said the impasse in Washington could be hurting business confidence, pointing to a separate report from the New York Fed on Tuesday showing its "Empire State" index on current business conditions fell to a reading of 3.9 in January from 11.5 in December.
The January reading was the lowest since May 2017 and reflected a slowdown in new orders and hiring. The New York Fed survey suggests national manufacturing activity likely moderated further in January after hitting a two-year low in December.
"The Empire State survey is an early indication that conditions continued to deteriorate early this year," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York. "We think the government shutdown is probably adversely affecting business sentiment, although the size of its impact is hard to gauge."