U.S. PPI Report: Producer Inflation Cools to 4.7% in July, Strengthening Fed Hold Case

U.S. producer inflation cooled more than expected in July, giving the Federal Reserve another reason to keep interest rates unchanged at its September meeting. The Producer Price Index for final demand was flat month over month, below economists’ forecast for a 0.2% increase, while annual PPI inflation slowed to 4.7% from 5.5% in June.

The July PPI report, released by the Bureau of Labor Statistics at 8:30 a.m. ET on Aug. 13, followed a revised 0.1% decline in June. The PPI tracks prices received by producers and is closely watched for signs of inflation moving through the supply chain toward consumers.

U.S. Producer Inflation Pulls Back From Recent High

The longer-term PPI trend shows that inflation remains elevated despite July's slowdown. Final-demand prices rose 4.7% over the past 12 months, but that was a notable retreat from June's 5.5% increase. A separate measure excluding food, energy and trade services rose 0.4% in July and 4.7% from a year earlier, showing that underlying price pressure did not cool as sharply as the headline reading.

U.S. PPI 12-Month Inflation Trend. Source: U.S. Bureau of Labor Statistics

Falling Goods Prices Offset Higher Services Costs

The details of the July PPI report explain why headline producer prices were unchanged. Prices for final-demand goods fell 0.7%, while services increased 0.2%. Construction prices rose 2.2%. Energy was the biggest drag on goods prices, falling 3.1%, while food declined 0.9%. Gasoline prices dropped 5.7% and accounted for more than half of the decrease in final-demand goods.

U.S. PPI Goods vs Services . Source: U.S. Bureau of Labor Statistics 

Services remain an important inflation risk. Portfolio-management prices jumped 6.5% in July, while prices for services excluding trade, transportation and warehousing rose 0.6%. Reuters also noted that much of the PPI data is collected early in the month, meaning sharp oil-price increases later in July were probably not fully reflected in the report.

Treasury Yields Fall as Fed Rate Pressure Eases

Bond markets initially treated the softer PPI report as supportive for a less aggressive Federal Reserve. Treasury yields moved lower after the release, with the decline more pronounced in shorter maturities that are sensitive to expectations for Fed policy.

A TradingView snapshot at 9:18 a.m. ET showed the two-year Treasury yield near 4.15%, below its 50-period exponential moving average of about 4.22%. The four-hour chart also showed the yield extending a broader decline from its late-July highs.

What Does the July PPI Report Mean for the Fed?

The PPI data strengthens the case for the Fed to hold rates steady rather than raise them in September, but it does not eliminate inflation concerns. July CPI, released a day earlier, rose 0.1% month over month and 3.4% annually, while core CPI increased 0.2% and 2.5% from a year earlier.

The Fed kept its benchmark rate at 3.50%-3.75% in July, with three policymakers favoring a quarter-point increase. Its next policy meeting is scheduled for Sept. 15-16. Richmond Fed President Tom Barkin said Thursday that whether another rate increase will ultimately be required remains an open question, leaving upcoming inflation, employment and energy-price data central to the September decision.