The latest report from the Bureau of Labor Statistics has revealed that US producer prices grew at a pace less than anticipated last month, highlighting a contrast between rising wholesale costs of goods and a decline in the services sector. On a seasonally adjusted basis, the US producer price index (PPI) increased by 0.1% in July, which falls short of the consensus forecast of a 0.2% uptick, and marks a deceleration from June's 0.2% increase. Delving deeper into the components, the index for final demand goods rose by 0.6% in July, rebounding from a 0.4% decline recorded in the previous month.
In contrast, the final demand services index saw a decrease of 0.2% following a slight gain of 0.4% in the prior month. Specific contributors to the PPI showed that the final demand energy index experienced an increase of 1.9%, while food prices saw a modest rise of 0.6% month over month. Notably, the core index (excluding food, energy, and trade services) registered a gain of 0.3%, exceeding analysts' expectations for a modest 0.2% increase. Year-over-year, the PPI displayed a 2.2% increase for the month of July, a slowdown from June’s 2.7% growth and also below the anticipated 2.3% increase projected by analysts.
A closer look at this trend reveals that the services component leapt by 2.6%, while goods saw an increase of 1.7%. Additionally, the final demand energy index rose by 0.3% compared to the same period last year. Economists have interpreted this PPI report, which was cooler than expected, as a potentially bullish signal for those advocating for a near-term reduction in interest rates.
Lindsey Piegza, Stifel’s Chief Economist, commented in a note that while the lack of consistency among the underlying components—highlighted by a rise in prices, excluding food, energy, and trade services—adds uncertainty. This situation increases the importance of the upcoming consumer price index (CPI) release, which is anticipated to provide further insights into the prevailing trends in price pressures. The consensus expectations for the CPI point towards a sequential increase of 0.2% and an annual increase of about 3% for July, as compiled by Bloomberg.
Market participants are currently evaluating a roughly 47% probability that the Federal Reserve will opt to lower its benchmark lending rate by 25 basis points in the upcoming month, with the remaining odds favoring a reduction of 50 basis points, as derived from the CME FedWatch tool. In the broader context of monetary policy, the Federal Open Market Committee has incrementally tightened its monetary approach, increasing rates by a total of 525 basis points from March 2022 until July 2023, primarily aimed at curbing inflationary pressures.
Notably, the committee has maintained interest rates at a steady level since then, with its most recent pause occurring late last month..