A key measure of wholesale inflation rose less than expected in July, further opening the door for the Federal Reserve to start cutting interest rates.
The Labor Department’s Bureau of Labor Statistics reported Tuesday that the producer price index, which measures the selling prices that producers receive for goods and services, rose 0.1 percent on a monthly basis. Excluding the volatile food and energy components, the core PPI remained flat.
Economists surveyed by Dow Jones had forecast a 0.2% increase in both the all-item and core indexes.
Another core measure, which also excludes business services, showed a 0.3% gain.
On an annual basis, the core producer price index rose 2.2%, a sharp decline from the 2.7% reading in June.
Stock market futures rose on the news while Treasury yields fell.
Wholesale inflation was relatively mild despite a 0.6% rise in final demand prices, the biggest gain since February, due primarily to a 1.9% rise in energy, including a 2.8% increase in gasoline.
Countering the move, the services sector fell 0.2%, the biggest decline since March 2023, according to the Bureau of Labor Statistics. Trade services prices fell 1.3%, while machinery and motor vehicles wholesale margins fell 4.1%. A 2.3% increase in portfolio management offset some of the decline in services prices.
The producer price index is a leading indicator of inflation because it measures inflation from the perspective of manufacturers and suppliers of goods and services. Its counterpart, which will be released on Wednesday, is the consumer price index, which measures the actual prices consumers pay in the marketplace. Economists are also forecasting monthly increases of 0.2% for both the headline and core CPI.
Both measures are closely watched for signs of inflation. Although the Fed focuses more on the Commerce Department’s PCE price index, both the CPI and PPI are included in the calculation.
The latest inflation data comes as markets are fully pricing in the possibility of a rate cut at the Federal Reserve’s September meeting. The key question now is whether the central bank will cut rates by a quarter point or half a percentage point. Futures markets are currently pricing such a cut as a close call.
Fed officials have pledged to continue fighting inflation until they reach their 2% target, and recent data has been mostly cooperative.
A New York Federal Reserve survey released Monday showed consumers' view of inflation three years from now has fallen to 2.3%, the lowest level in the survey's 11-year history.
Moreover, the survey also showed that consumers, particularly at the lower end of the income scale, are starting to suffer more from inflation. For example, the likelihood of not paying off minimum debt in the next three months jumped to 13.3%, the highest level since April 2020, with the bulk of the one-percentage-point monthly increase coming from households making less than $50,000 a year.
Expectations of access to credit also fell, and household spending expectations over the next year fell to their lowest level since April 2021.
