Producer prices: U.S. producer prices rose modestly in July, with an energy-driven increase in the cost of goods partly offset by falling service prices, the latest data from the Labor Department showed. The producer price index (PPI) for final demand rose just 0.1% last month, following an unrevised 0.2% increase in June. Economists polled by Reuters had forecast a slightly larger 0.2% rise, but the actual increase suggests a continued moderation in inflation pressures.
In the 12 months through July, the PPI rose 2.2%, up from 2.7% in June. The report’s findings support the view that inflation is cooling, which may influence the Federal Reserve’s decisions on future interest rate cuts.
Goods prices, which had been trending downward for two consecutive months, rebounded with a 0.6% increase in July, the largest increase in five months. This was mainly due to a 1.9% increase in energy prices, which accounted for almost 60% of the total increase in goods prices. Wholesale gasoline prices rose by 2.8%, and there were also notable price increases for diesel and jet fuel. In addition, wholesale food prices saw a significant 0.6% increase after a modest 0.1% increase in June, with meats, fresh fruits, and melons becoming more expensive compared to the previous month.
Service prices fall amid lower margins
While goods prices saw a rebound, the cost of services saw a decline. Service prices fell 0.2% in July, marking the largest decline since March 2023, after a 0.4% increase in June. The decline in services was largely attributed to a 1.3% decline in business services, which measure changes in margins received by wholesalers and retailers. Margins on the wholesale sale of machinery and vehicles fell sharply by 4.1%, contributing significantly to the overall decline in service prices.
Other sectors, such as food and alcohol retail, automobiles, automotive fuels and lubricants, and software publishing for mobile and desktop devices, also saw margin declines. However, not all service sectors saw price declines: transportation and warehousing services, for example, saw costs rise by 0.4%.
Airfares, which had risen 0.4% in June, dipped slightly by 0.2% in July. Meanwhile, health care and health insurance costs rose 0.1%, following a 0.2% increase in the previous month. Inpatient hospital care costs rose 0.2%, albeit at a slower pace compared with June’s 0.4% increase. Hotel and motel room prices continued to fall, dropping 0.4% after a 0.5% decline in June. Portfolio management fees, which are also a component of the personal consumption expenditures (PCE) price indices tracked by the Fed, rose 2.3% in July, though this gain is expected to reverse after a recent stock market sell-off.
The Federal Reserve’s fight against inflation continues
The modest rise in producer prices, along with declining utility costs, is seen as a positive sign for the Fed’s ongoing efforts to combat inflation. “Producer price increases cooled this month, which is good news for the Fed’s fight against inflation,” said Christopher Rupkey, chief economist at FWDBONDS. “But there is no PPI deflation, so Fed officials don’t have to rush to judgment and bring forward rate cuts because the economy is going downhill.”
Excluding the volatile food, energy and trade components, core CPI rose 0.3% in July, following a 0.1% increase in June. On a year-over-year basis, core CPI rose 3.3%, slightly above the 3.2% increase recorded in June.
At a time when inflation is showing signs of slowing and the labor market is starting to cool, financial markets are increasingly anticipating that the Federal Reserve could begin its easing cycle in September. The U.S. central bank has kept its benchmark overnight interest rate in the 5.25% to 5.50% range for the past year, after having raised it by 525 basis points during 2022 and 2023.
Citigroup economist Veronica Clark noted that the latest CPI data has led to a slight revision in the forecast for core PCE inflation, a key metric tracked by the Federal Reserve. “We have modestly lowered our measure of core PCE inflation from 0.20% to 0.18%, with the final forecast more dependent on the CPI data due out tomorrow,” she said.
As the Federal Reserve continues to monitor inflation and economic conditions, the possibility of an interest rate cut remains on the table, particularly amid concerns about a weak labor market. The unemployment rate rose to a nearly three-year high of 4.3% in July, leading some analysts to speculate that a 50-basis-point rate cut could be a possibility in the near future.
With contributions from Reuters
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