U.S. Producer Inflation Was Flat in July as Annual PPI Slowed to 4.7%

U.S. producer prices were unchanged in July, while the annual increase in the Producer Price Index slowed to 4.7% from 5.5% in June, adding to evidence that inflation pressures eased after a sharp run-up earlier in the year.

The flat monthly reading was softer than economists had expected. A Reuters poll had pointed to a 0.2% increase. June was also revised to show a 0.1% decline in final-demand prices, rather than the 0.3% drop initially reported. The July result, however, was not broad-based weakness: lower goods prices were offset by higher prices for services and construction.

The Bureau of Labor Statistics said final-demand goods prices fell 0.7% in July, while services rose 0.2% and construction prices increased 2.2%. The split matters because the headline number suggests little movement in overall producer prices, but several underlying categories continued to show firm inflation.

Energy and food prices drove the decline in goods

Energy was the largest source of relief on the goods side. Final-demand energy prices fell 3.1% in July after a 6.5% drop in June. Gasoline prices declined 5.7%, accounting for more than half of the monthly decrease in the final-demand goods index. Diesel fuel, jet fuel, residual fuels and thermoplastic resins also became cheaper, according to the BLS.

Food prices at the producer level fell 0.9% for the month. Fresh and dry vegetable prices were among the categories that declined, while motor vehicles and equipment rose 0.3%. Excluding food and energy, final-demand goods prices increased 0.1% in July. On a 12-month basis, goods prices were still 6.5% higher, showing that the recent monthly declines have not yet erased the earlier increase in producer costs.

The pipeline data told a similar story. Prices for processed goods used as intermediate inputs fell 0.6% in July, and unprocessed goods for intermediate demand dropped 1.8%. Yet those indexes were still up 9.9% and 7.1%, respectively, from a year earlier. That combination points to meaningful short-term easing in some input costs without showing that the earlier inflation surge has fully disappeared.

Services moved in the opposite direction. Final-demand service prices increased 0.2%, led by a 0.6% rise in services excluding trade, transportation and warehousing. Portfolio-management prices jumped 6.5%. Transportation and warehousing prices fell 1.8%, while trade-service margins slipped 0.1%.

Underlying measures were firmer than the headline

Two measures that strip out volatile or margin-sensitive categories showed more persistent pressure than the zero change in headline PPI. Final demand excluding food and energy rose 0.2% in July and was up 4.2% from a year earlier. A broader BLS measure that excludes food, energy and trade services increased 0.4% for the month and 4.7% over 12 months.

That distinction is important when interpreting the report. The annual headline PPI has slowed from 5.9% in May to 5.5% in June and 4.7% in July, but the July data do not show producer inflation disappearing across the economy. Much of the monthly cooling came from energy and food, while several service categories continued to rise.

The producer-price report also follows a softer July consumer-price reading. The Consumer Price Index rose 0.1% in July and 3.4% from a year earlier, while core CPI increased 0.2% for the month and 2.5% over 12 months. PPI and CPI measure different parts of the inflation process, so they should not be treated as interchangeable. Producer prices measure prices received by domestic producers, while consumer prices measure what households pay for a basket of goods and services.

Still, parts of the PPI feed into the Personal Consumption Expenditures price index, the inflation measure the Federal Reserve uses for its 2% target. Financial services and health-care components are among the producer-price categories that can affect the PCE calculation, making the details of the report relevant even when the headline PPI itself is not the Fed’s target measure.

The Fed has more data to weigh before September

The July PPI release arrived as Federal Reserve officials weigh whether inflation remains high enough to justify another rate increase against signs of a softer labor market. The Federal Open Market Committee left the federal funds target range at 3.50% to 3.75% at its July 28-29 meeting. Its next scheduled policy meeting is September 15-16.

Labor data have added another constraint to the decision. U.S. nonfarm payrolls fell by 23,000 in July, while the unemployment rate was little changed at 4.1%. May and June payroll gains were revised down by a combined 103,000. Average hourly earnings were 3.2% higher than a year earlier. Those figures do not by themselves determine the Fed’s next move, but they give policymakers a weaker employment backdrop than they had a few months ago.

Reuters reported that Thursday’s PPI data added to the case for leaving rates unchanged in September. The report also carried a caveat for the next inflation readings: much of the PPI information is collected early in the month, so the sharp rise in oil prices later in July was probably not fully reflected in the July index. If higher fuel costs persist, they could make the August producer-price report less benign.

The next major inflation milestone is the July PCE report, scheduled for August 26. Before the PPI release, economists cited by Reuters expected core PCE prices to rise 0.2% for the month and 3.3% from a year earlier, the same annual pace as in June. That is a forecast, not a confirmed reading, and the actual PCE figures will incorporate information from both the CPI and PPI reports.

The BLS is scheduled to release August producer-price data on September 10, five days before the Fed begins its September meeting. That will give policymakers one more look at whether July’s flat headline PPI marked a broader cooling trend or mainly reflected a temporary drop in energy and food costs.