The Producer Price Index (PPI) was unchanged in July, coming in below the 0.2% monthly rebound economists expected after June's upwardly revised 0.1% decline, the Bureau of Labor Statistics reported Thursday.
The annual producer inflation rate eased to 4.7%, down from 5.5%, and below the 4.9% consensus.
Core PPI, which strips out food and energy, rose 0.2% in the month against the 0.3% expected, with the annual core rate easing from 4.7% to 4.2%, in line with expectations.
The print lands a day after the July Consumer Price Index (CPI) rose just 0.1% month over month, pulling annual inflation down to 3.4% from 3.5%, with core CPI up 0.2% and its annual rate easing to 2.5%, an in-line report that showed the energy-driven inflation burst continuing to fade.
Where Did Producer Prices Fall And Rise In July?
Energy was the biggest source of relief.
Final-demand energy prices fell 3.1% in July after declining 2.8% in June. Gasoline prices dropped 5.7%, accounting for more than half of the decline in final-demand goods prices.
Food prices also fell, with final-demand food prices down 0.9%. Diesel fuel, jet fuel and residual fuel prices declined as well.
Not everything moved lower.
Prices for motor vehicles and equipment rose 0.3%, while electric power and grains also increased. On the services side, final-demand prices rose 0.2%, which was considerably slower than the 0.5% increase in June.
One notable exception was portfolio management, where prices jumped 6.5% in July.
Overall, final-demand goods prices fell 0.7%, while services rose only 0.2%. The result was a flat headline PPI reading for the month.
There was also an important divergence beneath the flat headline.
Prices for final demand less foods, energy and trade services - the gauge the Fed watches most closely for the inflation trend - rose 0.4% in July, compared with just 0.1% in June.
That suggests the disinflation story is not completely uniform.
Market Reactions
The market initially treated the report as another piece of good news for the Fed.
The 2-year Treasury yield fell to 4.163%, while the dollar slipped and gold moved higher.
U.S. equity futures also edged up, with the S&P 500, Nasdaq 100, Dow Jones and Russell 2000 all in positive territory.
On Wednesday, the SPDR S&P 500 ETF Trust (NYSE: SPY) closed at $772.49, just 0.3% below record highs.
The key number, however, remains the September Fed meeting.
Fed futures still imply a 38.4% probability of a 25-basis-point hike, against a 61.6% probability of no change.
That probability has fallen from 55% one week ago and 51.2% one month ago for a hike, according to the market data in the chart.
In other words, the market is already moving toward a Fed hold.
Today's PPI report gives that move another reason to continue.