PPI Rises in July as Service Prices Rise
The U.S. Producer Price Index (PPI) in July rose at its fastest pace in three years, driven by a rise in service prices.
With statistics by the U.S. Bureau of Labour Statistics released Thursday, the year-over-year PPI increased 3.3%, up from June’s 2.3%. It is the largest increase in a year since February and beat expectations of an increase of 2.5%. On a monthly basis, the PPI increased 0.9%, the largest since June 2022, far exceeding the forecasted 0.2%.
Core PPI Speeds Past Forecasts
The core PPI, excluding food and energy, rose by 3.7% year-on-year, the highest since February and above the predicted 3%. Core PPI rose 2.6% in June year-on-year. Core PPI rose 0.9% month-on-month, the largest since April 2022, from the no-change reading in previous months.
Service prices rose 1.1%, the highest since March 2022. Wholesale and retail margins rose 2%, led by machinery and equipment wholesaling. Prices for commodities other than food and energy rose 0.4%.
Market Reaction to Inflation Data
Equity index futures fell following the release. NASDAQ futures fell 0.36%, S&P 500 futures fell 0.35%, and Dow Jones futures fell 0.29%. The U.S. dollar index gained 0.21% intraday, while spot gold prices fell 0.32%.
Traders lowered their expectations for a Federal Reserve interest rate decrease next month in September. Chances of a 0.25% rate cut next month, according to data from the CME Group, stood at around 95%, down from 100% yesterday.
Comparison to Consumer Price Trends
The PPI report follows the July Consumer Price Index data, which showed consumer inflation in line with expectations. Core consumer inflation posted a six-month high last month. Consumer prices increased 3.1% from 2.9% annually in June and remained above the Federal Reserve’s 2% threshold.
Whereas consumer prices catch costs to buyers, producer prices catch price changes from the firm’s perspective, i.e., firms that manufacture goods and services.
Business Cost Pressures and Pass Through of Prices
Economists elaborated that firms may be passing on increasing costs of production to consumers increasingly. Ben Ayers, a senior economist at Nationwide, explained that firms have so far taken on most tariff-related expenses but mounting costs of imports are squeezing margins.
Stephen Brown of Capital Economics attributed the surge in core PPI partly to widening margins for wholesalers and retailers. He said some of the growth in services prices was attributable to management fees tied to recent stock market performance.
Federal Reserve Policy Outlook
The current labor market dynamics and the comments by Federal Reserve policy makers have given solid backing to anticipations that there could be a lowering of the rate sometime soon. Nonetheless, the current improvement in PPI beyond the estimated projection has cast doubts as to when the policy interventions are to take place.
Chairman of the Fed Jerome Powell is delivering a speech at the Jackson Hole Economic Symposium on Aug 22. During his speech, he will give an indication of the attitude of the central bank toward inflation and a possible time when the rate-reduction cycle can be instigated in the fall.
Also Read: https://colitco.com/us-markets-rise-fed-rate-cut/
Final Thoughts—Will Higher Producer Prices Foil the Fed’s Rate Cut Plans?
The most recent PPI figures indicate increased cost pressures at the business level, especially among services. producer With producer as well as producer consumer inflation above the central bank target, the Federal Reserve is in a delicate balance of supporting growth while keeping inflation in check.
Whether July’s steep rise in producer prices will challenge the Fed to alter the rate at which it expects rate cuts remains to be seen.
