US producer price growth decelerated more than expected in July, with the producer price index remaining unchanged from June, according to Bureau of Labor Statistics data. On an annual basis, the PPI rose 4.7% in July, down from 5.5% in June and below the 0.2% rise expected by economists surveyed by Dow Jones. The June decline was also revised to 0.1% from the previously reported 0.3% fall. The latest producer price data follows consumer price data showing moderating inflation, with consumer prices rising 3.4% year-over-year in July, down from 3.5% in June. Federal Reserve officials will have access to both consumer and producer price data before their next policy decision in mid-September, as well as another labor market report.
Energy costs remained a significant driver of inflation, with gasoline prices falling 5.7% in July, accounting for more than half of the overall decline in goods prices. However, gas prices are still 25% higher than a year ago, and fuel oil prices surged 39.1% from the previous year. Energy prices declined 3.1% from June, marking the second straight decline, indicating that the impact from high fuel costs is diminishing. The transportation and warehousing sector showed declines of 1.8% in July, the most significant drop since April 2023, adding to evidence that energy cost pressures are easing. Gas prices averaged $4.04 per gallon nationwide in July, 16 cents higher than the previous month, according to AAA data. The Iran war's impact on energy prices through the Strait of Hormuz, which handles a fifth of global energy supplies, continues to influence inflation dynamics, though recent Middle East developments are raising concerns about potential inflationary pressures.
Excluding volatile food and energy categories, core inflation slipped to 2.5% in July from 2.6% in June, providing additional support for the Fed's inflation-fighting efforts. Core prices rose 0.2% month-over-month, which would be low enough over time to bring inflation closer to the Fed's 2% goal. The core PPI rose 0.2% in July, below the 0.3% increase expected by economists, while core PPI excluding trade services rose 0.4%. For the 12 months ended in July, the index for final demand excluding food, energy and trade services rose 4.7%. Underlying price pressures also softened during the month, with core wholesale inflation easing to 4.2% year-on-year in July from 4.7% in June. The 0.2% monthly increase in core prices was slower than the 0.4% increase recorded between May and June, as reported by the Labor Department.
The bond market's immediate reaction to the producer price data was positive, but yields have since recovered about half of their initial decline. The 30-year long bond yield is back above 5.20%, reflecting some investor skepticism about the sustainability of the inflation decline. Market analysts noted that the best thing in the report was the price of food, which declined significantly. However, the tailwind from the Iran MOU is over, and the headwind of the Strait of Hormuz closure is back, explaining the bond market's second thoughts. The national average price of diesel rose from $4.8746 to $5.4043 in the last month, representing a 10.9% increase, which will likely impact future PPI data as the BLS sampling dates and diesel prices on those dates become more relevant for inflation measurements.
