Wholesale Inflation Slows as Gas and Food Costs Fall

Wholesale price inflation cooled last month as gasoline and food costs declined, providing fresh evidence that price pressures across the U.S. economy may be easing and giving the Federal Reserve more leeway to hold interest rates steady at its September meeting. The Labor Department’s producer price index — which captures inflation before it reaches consumers — rose 4.7% in July from a year ago, down from a much larger 5.5% increase in June, according to AP News. On a monthly basis, wholesale prices were unchanged from June to July.

Context: A Cooling Trend Amid Elevated Prices

The July report marks the second consecutive month of easing inflation, following a period when sharply higher gas prices pushed consumer inflation to a three-year high of 4.2% in May. The slowdown comes as the Federal Reserve debates whether to raise its key interest rate to combat inflation or keep it unchanged in hopes that price pressures continue to cool on their own.

Excluding the volatile food and energy categories, core wholesale inflation dropped to 4.2% in July compared with a year earlier, down from 4.7% in June. On a monthly basis, core prices rose 0.2%, down from 0.4% from May to June.

What Drove the Decline

Final demand goods fell 0.7% in July, driven by a 3.1% decline in energy prices and a 0.9% drop in food costs. Gasoline prices fell 5.7% month-over-month, accounting for more than half of the entire goods-side decline. Diesel, jet fuel, and residual fuels also dropped.

However, the flat headline masks persistent pressures beneath the surface. Final demand services advanced 0.2% in July, with portfolio management fees surging 6.5% — a direct read-through from equity markets pushing toward all-time highs. The measure excluding food, energy, and trade services rose 0.4% for the month and 4.7% annually, indicating that underlying producer inflation remains well above the Fed’s 2% target.

“The soft (producer prices) reading for July points to reduced inflationary pressure for businesses in coming months,” said Ben Ayers, senior economist at Nationwide, as reported by AP News. “While the renewed rise in fuel costs is concerning, input costs beyond energy are cooling.”

The Fed’s Dilemma

The cooling data gives Federal Reserve officials more room to avoid a rate hike when they meet in September. The FOMC voted 9-3 to hold rates at its July 28-29 meeting, with three dissenters pushing for a hike. The fed funds rate currently sits at 3.50%-3.75%.

Market expectations for a September rate increase have collapsed dramatically. According to 24/7 Wall St, CME FedWatch odds of a September rate hike fell from 55% before the CPI release to 42% after, then crashed to 32% following the PPI report.

“We’re clearly not out of the woods, however it makes the Fed’s decision a little bit easier, because now you see that inflation is creeping down,” said Dan North, senior economist at Allianz Trade North America, as reported by AP News.

The July jobs report, which showed employers cut 23,000 jobs, adds further pressure against a rate hike. Unemployment dipped to 4.1%, and Q2 GDP grew at a sluggish 1.5% annualized rate — signs of economic weakness that could discourage the central bank from raising borrowing costs.

Underlying Pressures Remain

Despite the encouraging headline, economists caution that the inflation fight is far from over. The producer price index excluding food, energy, and trade services rose 0.4% for the month and 4.7% annually — a measure that strips away the volatile energy declines that drove July’s flat headline.

As Armstrong Economics notes, “July PPI probably did not fully capture the late-July increase in oil prices.” Gas prices averaged $4.04 a gallon nationwide on August 12, 16 cents higher than a month ago, according to AAA. Gasoline prices began rising again in late July and early August as Strait of Hormuz tensions resumed, threatening to push inflation back up when August figures are reported next month.

The average monthly price of crude fell from roughly $80.38 a barrel in June to $79.32 in July, despite intermittent spikes from Hormuz disruptions. But energy remains volatile and externally driven, and a reversal could quickly unwind the disinflationary narrative.

What to Watch Next

The Fed’s preferred inflation gauge — the personal consumption expenditures (PCE) index — will be released on August 26. Economists forecast it will show yearly core inflation remained unchanged in July at about 3.3%, a level that could raise concerns among some Fed officials that inflation remains too far above the central bank’s 2% target.

As TFTC notes, “The disinflationary story is fragile. Real producer price inflation is still running at 4.7% annually, the fed funds rate sits at 3.50-3.75%, real rates on producer costs are negative, and any oil price reversal unwinds the entire narrative.”

The September FOMC meeting (September 15-16) will be the next key decision point. The combination of cooling inflation data and a softening labor market gives Fed Chair Kevin Warsh cover to hold rates, but the PCE report and August inflation data will determine whether the recent improvement proves durable.

“While a July rate hike remains highly unlikely, the September FOMC meeting could become the first meaningful test of whether the recent improvement in inflation proves durable,” said Gregory Daco, EY-Parthenon Chief Economist, as reported by AP News.

For consumers, the cooling data offers some relief, though prices are still rising faster than wages for the past four months. The cost of services such as healthcare, restaurant meals, and car maintenance rose 3% annually and isn’t sensitive to gas prices — a reminder that the inflation problem extends beyond the pump.