US producer inflation cools to 4.7% as energy costs fall

US producer inflation cooled more than expected in July, with headline PPI rising 4.7% year-over-year versus a 4.9% consensus, as falling energy and food costs pulled goods prices lower.

"The weaker-than-expected producer inflation report reinforces the disinflationary signal delivered by Wednesday's CPI figures," said Ghiles Guezout, a market analyst at FXStreet.

The monthly PPI was flat, below the 0.2% consensus and improving from a revised 0.1% decline in June. Core PPI, excluding food and energy, rose 0.2% month-over-month, down from a revised 0.4% and below the 0.3% consensus. On an annual basis, core PPI slowed to 4.2% from 4.7%. The weakness was concentrated in goods, where prices fell 0.7% month-over-month, with energy down 3.1% and food down 0.9%. Services rose 0.2%, while construction prices jumped 2.2%. One caution: the Fed's preferred underlying gauge excluding food, energy and trade services accelerated from 0.1% to 0.4% month-over-month, even as the annual rate eased from 5.0% to 4.7%.

The data, combined with Wednesday's softer CPI, further reduces the immediate need for another Fed hike. September hike probabilities fell to 35% after the CPI report. The US dollar index traded around 99.93, down 0.04%. However, policymakers are unlikely to declare victory before August figures capture the latest rebound in oil prices, with Brent around $87 and WTI near $81.

The July report marks the second consecutive month of cooling pipeline inflation after the first oil shock pushed producer prices to 5.5% in June. The goods breakdown was particularly soft: energy prices fell 3.1% month-over-month and food declined 0.9%, while goods excluding food and energy rose just 0.1%. Services were firmer but uneven — trade services slipped 0.1% and transportation and warehousing fell 1.8%, while other services rose 0.6%. Construction prices, a smaller but volatile component, jumped 2.2% month-over-month.

The disinflationary signal extends beyond the headline. The Fed's preferred underlying producer-price gauge, which excludes food, energy and trade services, eased to 4.7% year-over-year from 5.0%. Yet the monthly acceleration in that measure — from 0.1% to 0.4% — serves as a reminder that the disinflation path is not linear, particularly as energy prices have rebounded in August. The last time the underlying gauge accelerated at this pace was in the spring, when the oil shock was still building, and it preceded a sharp jump in the headline rate.

The PPI data feeds directly into the Federal Reserve's preferred inflation gauge, the personal consumption expenditures price index. With both producer and consumer inflation cooling in July, the PCE report due later this month is expected to show further moderation, which would give the Fed more room to hold rates steady at its September meeting.

For the Federal Reserve, the data flow supports a patient stance. The September rate hike probability fell to 35% after Wednesday's CPI report, and today's PPI does little to change that calculus. The dollar's muted reaction — the DXY slipped just 0.04% to around 99.93 — suggests the market had already priced in softer inflation data. Treasury yields dipped ahead of the release, with the 10-year continuing its post-CPI decline. Equities, meanwhile, have been supported by the disinflationary narrative, with the S&P 500 and Nasdaq trending higher on rate-cut bets and strong earnings.

The key risk remains the energy complex. Brent crude has drifted back to around $87 and WTI near $81 after the Strait of Hormuz was publicly declared open, but the waterway's reopening remains partial — fourteen vessels crossed on Tuesday versus roughly 120 per day before the conflict. If oil prices rebound further in August, the next PPI and CPI reports could reverse the disinflationary trend, keeping the Fed's September decision a coin toss. The July data, in that sense, closes the first chapter of the oil shock; August will open the next.

This article is for informational purposes only and does not constitute investment advice.