New data on inflation in July is helping the Fed’s doves as the odds for a rate hike in the last quarter of the year continue to decrease.
The producer price index—which represents the overall price level that producers receive—was unchanged on the month, while the core metric—which excludes food and energy—was running at the target level, rising by 0.2%.
The key components of the PPI that go into the calculation of the personal consumption expenditures index—the Fed’s preferred metric for inflation—came in only slightly higher than expected. We think those won’t likely add too much pressure to the PCE index when it released at the end of the month.
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Before the Fed’s September meeting, one more set of job and inflation data will be released and it could tip the scale in the Fed’s decision of a rate hike. We do see a high bar now for a rate increase as most of the inflation pressure has been from the supply side, which will eventually subside more quickly.
The economy is on such a solid footing that we believe without the shock from energy prices, there are not a lot of headwinds that would push inflation higher to guarantee a rate hike.
Inside the data
The producer price index for final demand was unchanged in July, undershooting the 0.2% consensus forecast.
On an unadjusted basis, the index for final demand increased by 4.7% for the 12 months ended in July, a meaningful step down from 5.5% in June. June’s monthly reading was also revised up to a decline of 0.1% from the initially reported decline of 0.3%.
On the goods side, prices for final demand goods fell by 0.7% in July, driven by a 3.1% decline in energy prices and a 0.9% drop in food prices. Prices for goods excluding food and energy edged up by only 0.1%. Gasoline prices fell by 5.7%, accounting for more than half of the decline in goods prices.
Services prices rose by 0.2%, with the increase led by a 6.5% surge in portfolio management fees.
Margins for health and beauty goods retailing, auto parts retailing, and food and alcohol retailing also contributed to the increase. On the other side, truck transportation of freight fell by 1.8%. Construction prices advanced by 2.2%.
Excluding food and energy, core PPI rose by 0.2% on the month, below the 0.3% consensus estimate. The narrower core measure that also strips out trade services increased by 0.4%, with its 12-month rate at 4.7%.
For the PCE translation, the portfolio management component will most likely add upward pressure given its 6.5% monthly jump—reflecting the lag from the equity market rally earlier in the year.
But the broader set of PCE-relevant categories, including healthcare services and transportation, remained contained. Pre-release estimates for July core PCE ranged from roughly 0.16% to 0.23% on the month, which, if realized, would be consistent with the Fed’s remaining on hold through September.
