A drop in July’s producer inflation suggests another month of favorable inflation data that should help seal the deal for a rate cut in September and more afterwards.
The final demand inflation rose 0.1% in July and 2.2% from a year ago. Even better, the core component of the producer inflation number that excludes food and energy was unchanged on the month and up 2.4% from a year ago. That implies underlying inflation within the CPI and PCE reports released later this month will continue to be encouraging.
The weak July job report has really spooked the market into realizing that growth is becoming more of the focus rather than inflation. We think the Fed will be the next one to prioritize growth over inflation, as inflation has largely been under control with most of the key inflation metrics staying between 2 and 2.5%. It is a more-than-tolerable range of inflation that requires no further tightening of monetary policy.
The downside surprise from Tuesday’s PPI data supports our call for a similar downside surprise from CPI, which will be released Wednesday. We expect the topline CPI number to come in at 0.1% on a monthly basis, lower than the current consensus forecast.
The main driver of the slowdown in producer inflation came from trade services, which posted a drop of 1.3% in July, the sharpest drop since 2015. This component represents wholesale and retail margin, a proxy for pricing power in the downstream sector.
Clearly, the data suggested a major shift in the sector’s profit margin, which has been compressed significantly as demand continues to slow. More discounts are on the shelves to lure customers, which is good news for inflation and growth but not for profit margins.
Food and energy prices picked back up in July after a number of months with low inflation. Energy prices rose 1.9% on the month, while food prices rose 0.6%.
If there is a concern, it would be about input prices, which grew at faster paces in July than what the topline numbers suggested. Unprocessed goods for intermediate demand rose 3.61% from a month ago, the largest increase since 2022. Prices at other intermediate stages also rose between 0.4 and 1.1% on a monthly basis.
Read the latest issue of RSM’s The Real Economy for Chief Economist Joe Brusuelas’ take on the need for rate cuts that prioritize growth.
