Driven by declines in energy and food, the U.S. July PPI year-on-year increase narrowed to 4.7%, echoing the cooling trend of CPI

According to Zhihui Finance APP, driven by further declines in energy and food costs, U.S. wholesale inflation in July rose at a year-on-year rate lower than market expectations, continuing its downward trend.

Data released by the U.S. Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) for July was flat month-over-month, below economists’ previous expectations of a 0.2% increase; year-over-year, PPI rose 4.7%, a clear drop from June’s 5.5%. The June PPI month-over-month number was also revised upward from the previously released -0.3% to -0.1%, meaning that final demand prices have not increased for two consecutive months.

Excluding food and energy, the core PPI rose 0.2% month-over-month, lower than the market expectation of 0.3%; year-over-year, it was up 4.2%. Further excluding trade services, core PPI increased by 0.4% month-over-month.

Chris Rupkey, chief economist at FwdBonds, said: “All in all, pipeline pressures at the early stages of production do not raise the risk of inflation for consumers. PPI final demand prices have not risen for a second straight month, which is good news for Americans facing a cost-of-living crisis.”

In detail, commodity prices in July fell 0.7% month-over-month, with energy prices down 3.1%, marking the second consecutive month of decline, and gasoline prices down 5.7%; food prices dropped 0.9%, the largest monthly fall since the start of the year. However, core goods prices—excluding food and energy—rose slightly by 0.1% month-over-month.

Service prices rose 0.2% month-over-month, with portfolio management fees surging 6.5%. Analysts noted that this segment often sees large fluctuations due to quarterly reporting requirements.

Transportation and warehousing costs fell 1.8% month-over-month, the biggest drop since April 2023, further indicating that the impact of high fuel costs on overall prices is diminishing. Meanwhile, the measure of inflation pressure at the early production stage—prices for processed intermediate demand goods, excluding food and energy—saw its smallest monthly increase since November last year.

However, the report also shows that cost pressures from data centers remain prominent. In July, electronic components and parts prices surged 28% year-over-year, near historic highs; computer and computer equipment prices rose 9.8% year-over-year, the largest increase on record.

Some PPI sub-items are included in the Federal Reserve’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) Price Index—and thus receive extra market attention. These sub-items showed mixed performance in July: portfolio management fees saw the largest increase in over a year, and hospital outpatient fees also rose sharply; physician services and hospital inpatient fees recorded relatively milder increases; airfares posted the largest monthly decrease since early last year.

The U.S. Bureau of Economic Analysis is scheduled to release July PCE price data on August 26. After the PPI data release, economists at Citi, Morgan Stanley, and Jefferies project the July core PCE Price Index will rise 0.2% month-over-month.

In addition, wholesale and retail trade service profit margins slightly declined in July after jumping in June. This segment is closely watched because it may reveal the extent to which businesses absorb tariff-related costs or pass them to consumers. Although the U.S. Supreme Court struck down several tariffs earlier this year, the Trump administration is still seeking other ways to levy tariffs on imported goods. The White House recently announced at least a 10% tariff on imports from most major trade partners.

Signs of Cooling Inflation Strengthen, but Middle East Risks Remain

This PPI report follows the previously released Consumer Price Index (CPI) data. Data released Wednesday showed July CPI inched up just 0.1% month-over-month, as falling energy prices helped ease price pressures. However, overall CPI year-over-year rose 3.4%, still well above the Fed’s 2% target. Core CPI increased 0.2% month-over-month and 2.5% year-over-year, returning to levels last seen before the war started.

Overall, after earlier inflation spikes driven by the Iran war and Trump administration tariffs, price increases are starting to ease. But recent renewed Middle East tensions continue to raise market concerns about the persistence of inflation.

After the release of PPI data, U.S. equity index futures rose, while U.S. Treasury yields fell. Traders further trimmed bets on a Federal Reserve rate hike in September. Market expectations have shifted in recent days, now favoring a Fed rate hike in October or December, whereas there was previously high anticipation for the Federal Open Market Committee (FOMC) to take action at its next meeting on September 15-16.

Federal Reserve officials will receive more consumer and producer price data as well as another labor market report before their mid-September policy meeting. Policymakers currently need to balance persistent inflation pressures with recent slowdowns in employment growth. Several key Fed officials have been pushing for rate hikes to bring inflation back to the 2% target.

Another government report released the same day showed that for the week ending August 8, initial jobless claims in the United States rose to 209,000, up 9,000 from the previous week and above the market expectation of 204,000, but still at low levels. Data released last week indicated that job growth was weaker than previously estimated.