The PPI final demand measure, which gives us a sense of pricing pressures in the pipeline, stabilized in July. That was cooler than many market participants expected, only 0.1% below a multi-year high hit in June. The PPI moved up 3.3% compared to one year ago, but the more volatile components, food and energy prices, receded in July. The drop in food prices is likely due to retaliatory tariffs on agricultural products, which are putting a crimp on farm incomes.
The core PPI (excluding food and energy) rose 0.3% in July, the same as June. The year-over-year gain was 2.8%, just 0.1% behind a multi-year high. What was unusual was the upward pressure in goods over services, which is a flip-flop from earlier in the cycle when service prices were accelerating more rapidly. The upward trend in goods prices is due in part to the rise in import prices. Vehicle prices moved up as producers announced additional tariff-related increases. Drug prices also rose, which is a concern for inflation this year. The slowdown in services inflation last month was due to a temporary drop in electric power prices after a surge in June due to record heat.
Prices in the producer pipeline are holding steady at a faster pace than earlier in the cycle. So far, however, the rise in inflation remains contained and well in line with the Federal Reserve’s expectations. The Fed is expected to hold to its gradual pace of rate increases unless prices shift dramatically higher.
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