A key indicator of wholesale inflation rose less than expected in July, opening the door for a rate cut by the US Federal Reserve.
The producer price index, which measures the selling prices that producers receive for goods and services, rose 0.1 percent month-on-month, the U.S. Department of Labor's Bureau of Labor Statistics reported on Tuesday. Excluding the volatile components of food and energy, the core PPI remained unchanged.
Economists surveyed by Dow Jones had expected an increase of 0.2 percent in both the overall indicators and the core values.
Another key figure, which also excludes trade services, showed an increase of 0.3 percent.
Year-on-year, the Producer Price Index (PPI) rose by 2.2 percent, a significant decline from 2.7 percent in June.
Stock market futures rose following the news, while Treasury yields fell.
Wholesale inflation was relatively modest despite a 0.6 percent increase in final goods prices, the largest increase since February, and was primarily due to a 1.9 percent increase in energy prices, including a 2.8 percent increase in gasoline.
In contrast, there was a 0.2% decline in the services sector, the largest decline since March 2023, according to the BLS. Prices for trade services fell 1.3%, while margins in the wholesale trade of machinery and vehicles fell 4.1%. A 2.3% increase in portfolio management offset some of the decline in services prices.
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The PPI is considered a leading indicator of inflation because it measures the rate of inflation from the perspective of manufacturers and suppliers of goods and services. Its counterpart, released on Wednesday, is the Consumer Price Index, which measures the actual prices consumers pay in the market. Economists also expect a monthly increase of 0.2% for both the headline and core CPI.
Both measures are closely watched for signs of inflation. Although the Fed focuses more on the Commerce Department's personal consumption expenditures price index, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) are included in this calculation.
The latest inflation data comes at a time when markets have already priced in a rate cut at the September meeting of the Fed's Open Market Committee. The key question now is whether the central bank will cut by a quarter or half a percentage point. The futures market currently rates this as uncertain.
Fed officials have said they will continue to fight inflation until the 2 percent target is reached, and recent data largely shows that this is true.
A survey released by the New York Fed on Monday showed that consumers' inflation forecast for the next three years fell to 2.3 percent, the lowest in the survey's 11-year history.
In addition, the survey also showed that consumers, especially at the lower end of the income scale, are increasingly suffering more from inflation. For example, the perceived likelihood of not being able to make a minimum debt payment in the next three months rose to 13.3 percent, the highest since April 2020. Most of the 1 percentage point monthly increase was among households with annual incomes below $50,000.
Expectations for access to credit also declined and expectations for household spending for next year fell to their lowest level since April 2021.
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