U.S. producer prices were unchanged in July, according to the Bureau of Labor Statistics, as falling energy and food costs offset modest increases in services. The Producer Price Index (PPI)—a measure of wholesale inflation pressures—registered 0% growth from June, below the 0.2% increase economists had forecast. On an annual basis, the PPI rose 4.7%, down from 5.5% in June.
The report follows a 0.1% decline in June, revised from an earlier estimate of a 0.3% drop. Core PPI, which excludes volatile food and energy prices, increased 0.2% for the month and 4.2% year-over-year, also below expectations. The data suggests tentative signs of easing inflation pressures, though officials caution that risks remain.
Stocks and bonds reacted positively to the report. The S&P 500 and Nasdaq Composite both rose, with the S&P 500 hitting a new all-time high. U.S. Treasury yields fell, with the 10-year yield dropping to 4.61% and the 30-year yield slipping to 5.18%, levels not seen since late July. The declines in yields could provide short-term relief for borrowers, including those seeking mortgages or refinancing, though the average 30-year fixed mortgage rate remains elevated at 6.74%.
Energy prices drove the monthly decline, falling 3.1% in July, with gasoline prices dropping 5.7%. Food prices also fell 0.9%, the largest monthly decline in over a year. Services inflation, however, rose 0.2%, led by a 6.5% jump in portfolio management costs. Goods prices overall declined 0.7%, while core goods (excluding food and energy) edged up 0.1%.
Federal Reserve officials are weighing the report as they consider whether to raise interest rates at their next meeting in September. Financial markets had previously priced in a higher probability of a rate hike, but the odds have since diminished. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, will be released later this month and is expected to reflect similar trends.
Economists offer mixed interpretations of the data. Some, like PNC Financial senior economist Kurt Rankin, argue the report supports the case for the Fed to maintain its current policy stance, citing moderating inflation pressures. Others, such as Samuel Tombs of Pantheon Macroeconomics, note that the absence of spillovers from energy prices into services inflation and a fragile labor market could keep rates unchanged for the remainder of the year.
The Treasury Department is set to auction $25 billion in 30-year bonds Thursday, potentially at the highest interest rate in a quarter-century. The auction’s outcome may provide further signals about market expectations for borrowing costs.
Background: The PPI measures prices received by U.S. businesses for goods and services, including sales to consumers, households, and foreign purchasers. Unlike the Consumer Price Index (CPI), which tracks prices paid by consumers, the PPI reflects upstream price pressures that may eventually translate to retail inflation. The July report suggests that while some inflation pressures are easing, the path to the Fed’s 2% inflation target remains uncertain.
Key Takeaways:
- Wholesale inflation held steady in July, with PPI unchanged and core PPI rising less than expected.
- Energy and food prices drove the monthly decline, while services inflation ticked up.
- Markets reacted with optimism, with stocks rising and bond yields falling on expectations of a Fed pause.
- Fed officials will scrutinize the data ahead of their September meeting, though opinions on the appropriate policy response vary.