July PPI inflation drops to 4.7%, undershooting Wall Street’s 5% forecast

Producer prices in the US came in flat for July, with the year-over-year rate dropping to 4.7% from a revised 5.5% in June. Wall Street had penciled in something closer to 5%.

The Bureau of Labor Statistics published the data on August 13 at 8:30 a.m. ET. The month-over-month change in final demand prices was exactly 0.0%, following a revised -0.1% decline in June.

What drove the cooldown

Goods prices fell 0.7% on the month, dragged lower by a 3.1% decline in energy costs. Gasoline alone dropped 5.7%.

Services ticked up 0.2%. Portfolio management fees led the way with a 6.5% monthly increase, a reminder that when stock portfolios grow, the people managing them charge more. That’s a mechanical feature of how the PPI captures financial services.

The core measure, which strips out food, energy, and trade services, rose 0.4% month-over-month and 4.7% on a year-over-year basis.

Why the PPI matters more than you think

The Producer Price Index measures what businesses pay before passing costs along to consumers. When producer prices cool, it tends to signal that consumer price pressures will ease in the months ahead, though the pass-through isn’t always one-to-one or immediate.

The year-over-year PPI rate fell by 0.8 percentage points in a single month, from 5.5% to 4.7%.

What this means for markets and rate expectations

The energy sector faces a more complicated picture. A 3.1% monthly decline in energy PPI, if sustained, could weigh on earnings for oil and gas companies heading into the third quarter.

For the bond market, the 4.7% year-over-year reading is likely to push yields lower at the short end of the curve. The long end may be slower to react, since core services inflation at 0.4% monthly is still running above the pace consistent with the Fed’s 2% consumer inflation target.

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