U.S. producer prices were unchanged in July, as lower gasoline and energy costs helped offset increases elsewhere in the economy. The softer reading could ease some of the pressure on the Federal Reserve to raise interest rates at its September meeting.
U.S. PPI Comes in Below Forecasts
The Labor Department reported on Thursday that the Producer Price Index (PPI) was unchanged month-on-month at 0.0% in July. Economists had expected a 0.2% increase, while the previous month’s figure showed a 0.1% decline.
The Bureau of Labor Statistics also revised PPI figures covering March through June. According to the agency, the adjustments reflected late reports and corrections submitted by respondents.
On an annual basis, producer inflation slowed more sharply than expected. PPI increased 4.7% in the 12 months through July, down from 5.5% previously and below forecasts of 4.9%.
A narrower measure excluding food, energy and transportation costs increased 0.4% during the month and 4.7% from a year earlier.
Falling Gasoline Prices Weigh on Producer Inflation
Lower energy costs played a major role in keeping July’s producer inflation contained.
Gasoline prices dropped 5.7%, while prices also declined for crude petroleum, natural gas liquids, thermoplastic resins and materials, diesel fuel and jet fuel.
Overall, the index for final demand energy fell 3.1% during the month.
Energy markets have experienced significant volatility in recent months amid developments in the Middle East. Investors continue to monitor tensions between the U.S. and Iran, including negotiations surrounding their prolonged conflict and the potential reopening of the Strait of Hormuz.
Portfolio Management Costs Rise Sharply
Price increases in several service categories partially offset the decline in energy costs.
The index for portfolio management jumped 6.5% during July. Margins also increased in sectors including automobiles, agricultural equipment and wholesale food distribution.
These increases prevented the broader PPI reading from falling into negative territory despite the significant decline in energy prices.
Core PPI Inflation Also Slows
Excluding food and energy, core PPI rose 0.2% month-on-month, slowing from a 0.4% increase in June. The reading was also below economists’ expectations for a 0.3% gain.
On an annual basis, core producer inflation eased to 4.2%, matching forecasts and falling from June’s 4.7% rate.
The figures provide further evidence that inflationary pressures are moderating, although producer price growth remains elevated compared with the Federal Reserve’s longer-term inflation objectives.
CPI Data Also Shows Cooling Inflation
The PPI report follows softer U.S. consumer inflation figures.
The Consumer Price Index (CPI) slowed to 3.4% year-on-year, down from 3.5% and in line with economists’ expectations.
On a monthly basis, headline CPI increased 0.1%, as expected, following a 0.4% decline in the previous month.
Together, the CPI and PPI reports will help analysts refine their estimates for the core Personal Consumption Expenditures (PCE) Price Index, one of the Federal Reserve’s preferred measures of underlying inflation.
Fed September Rate Decision in Focus
The softer inflation data has strengthened expectations that the Federal Reserve could leave interest rates unchanged at its September policy meeting.
According to CME FedWatch data cited in the report, markets assign a probability of more than two-thirds that policymakers will keep rates steady.
However, inflation remains well above the Fed’s target. Analysts at Vital Knowledge noted that price pressures are still elevated enough to keep another rate increase on the table.
They suggested that a potential September 16 rate hike could be received positively by markets if Fed officials communicate that it would represent either the final increase of the cycle or one of the last remaining moves.
The latest inflation figures therefore leave the Federal Reserve facing a delicate balance: producer and consumer price pressures are cooling, but underlying inflation remains high enough to prevent policymakers from declaring victory.
