U.S. producer prices rose less than expected in July, as service costs dropped, reinforcing hopes for an interest rate cut.
The Labor Department report showed moderating inflation, allowing the Fed to shift focus to the labor market.
A July unemployment surge to 4.3% sparked recession fears in markets, though economists largely dismissed them.
“Producer price increases cooled this month which is good news for the Fed’s inflation fight, but there is no PPI deflation, so Fed officials do not have to rush to judgment and bring rate cuts forward because the economy is headed downhill,” said Christopher Rupkey, chief economist at FWDBONDS.
The PPI for final demand rose 0.1% last month, falling short of the 0.2% gain economists predicted, according to the Labor Department.
The PPI rose 2.2% in the year to July, following a 2.7% increase in June.
Services prices fell 0.2% after a 0.4% June rise, due to a 1.3% drop in trade services—the biggest since February 2015.
Machinery and vehicle wholesale margins dropped by 4.1%.
Margins also fell in food, alcohol, automotive retailing, and software publishing. Thus, several sectors faced declines.
The National Federation of Independent Business survey showed declining pricing power, with fewer small businesses raising or planning price hikes in July.
“We expect gross margins to fall over the coming months as growth in consumers’ spending continues to slow, but July’s rapid rate of decline is unsustainable,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Transportation and warehousing costs rose 0.4%, while airline fares fell 0.2%. Healthcare costs increased 0.1% after a 0.2% rise.
Physician services dropped 0.2%, while inpatient care rose 0.2%. Hotel rates fell 0.4%, and management fees increased 2.3%, likely reversing.
Portfolio management fees, healthcare, lodging, and airline fares are key components of the PCE price indexes tracked by the Fed for its 2% target.
Economists estimated July’s core PCE index between 0.14% and 0.2%, with possible adjustments after Wednesday’s consumer price data.
Stocks rose on Wall Street, while the dollar fell and U.S. Treasury prices increased.
Fed Rate Outlook and Recent Price Trends
Financial markets expect a 25 basis point cut in September, with possible additional cuts in November and December, contingent on August’s jobs report.
The Fed kept its 5.25%-5.50% rate steady for a year, following a 525-basis-point hike in 2022 and 2023.
Goods prices rose 0.6% in July, mainly due to a 1.9% energy price increase, with gasoline up 2.8%.
Oil prices may rebound briefly due to softening demand in China, while wholesale food prices rose 0.6% with increased costs for meats and fruits.
Excluding food and energy, goods prices rose 0.2% in July, following no change in June.
The core PPI, excluding food, energy, and trade, rose 0.3% in July, up from 0.1% in June, with a 3.3% yearly increase.
“Although the pass-through from producer into consumer prices is incomplete and of variable length, today’s report is well within the range that allows the Fed to continue to place its primary focus on the labor market at upcoming policy decisions,” said Michael Hanson, an economist at J.P. Morgan.
Click here for more news on Finance and Investing.