US Producer Prices Fall Short of Expectations in July Amid First Drop in Service Costs This Year

US producer prices in July rose by a smaller margin than anticipated, as the service sector experienced its first decline in costs this year, reflecting a broader trend of moderating inflationary pressures. According to a report released by the Bureau of Labor Statistics on Tuesday, the producer price index (PPI) for final demand increased by just 0.1% from the previous month. Economists surveyed by Bloomberg had forecasted a 0.2% gain. On an annual basis, the PPI rose 2.2%, highlighting a slowdown in price growth.

Core PPI and Services Costs

The PPI excluding food and energy—often considered a more stable measure of inflation—remained unchanged from June, marking the mildest increase in four months. The core PPI, which excludes these volatile categories, rose by 2.4% compared to a year ago. The report revealed a notable decrease in service costs, which fell by 0.2% in July. Reduced margins at wholesalers of machinery and vehicles largely caused this decline.

Conversely, prices for goods climbed by 0.6%, the highest increase since February, driven by higher costs for food and gasoline. Stripping out food, energy, and trade services—considered a less volatile measure by many economists—prices rose by 0.3%, the most significant gain in three months. Compared with a year ago, this gauge increased by 3.3%.

Mortgage Rates Drop to Six-Month Low, Easing Housing Affordability Strain

Mortgage rates in the United States have fallen to their lowest level in six months, providing a glimmer of hope for those navigating the housing affordability crisis.

Implications for Federal Reserve Policy

The PPI data, which reflects US producer prices, precedes the more closely watched Consumer Price Index (CPI). The upcoming CPI report, due Wednesday, is anticipated to show a modest rise. The recent inflation data, combined with weaker-than-expected July employment figures, has led economists to predict a series of Federal Reserve interest rate cuts. These cuts are expected to begin next month. In response to the report, stock-index futures and Treasuries saw gains. Traders have raised their expectations for a half-point rate cut in September.

Production Pipeline and Final Demand Services

The report on US producer prices noted a 0.7% increase in the cost of processed goods for intermediate demand. This reflects the highest monthly rise since February. Higher diesel costs largely drove the increase. The reversal in margins following a significant increase in June caused the weakness in final demand services. Excluding trade services, wholesale prices rose by 0.3%, further illustrating the current dynamics in inflationary trends.

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