Producer prices surged more than expected in July, spurring inflation concerns

Wholesale inflation increased much more than expected in July, raising concerns about a resurgence of inflationary pressures in the economy. 

The Bureau of Labor Statistics on Thursday released the producer price index (PPI) for the month of July, which showed an increase of 0.9% from the prior month and 3.3% from a year ago. 

Those PPI figures were much hotter than the forecast of prices rising 0.2% on a monthly basis and 2.5% from last year that was estimated by economists polled by LSEG.

Core PPI, which excludes volatile components like food and energy, also rose 0.9% from last month and was up 3.7% from a year ago – well above the LSEG estimates of 0.2% and 2.9%, respectively. The 0.9% monthly increase in core PPI was the largest increase since March 2022.

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The rise in headline PPI to 3.3% comes after it was initially reported as 2.3% in June and revised up slightly to 2.4% with this report. The jump in core PPI to 3.7% comes after it was just 2.6% in June. Both headline and core PPI showed no monthly price growth in June prior to the rise in July.

Services prices moved up 1.1% in July, which was the largest rise since an increase of 1.3% in March 2022. Over half of the broad-based increase in prices for July was attributable to margins for trade services, which jumped 2% and measure changes in margins received by wholesalers and retailers.

Margins for machinery and equipment wholesaling jumped 3.8% in July, accounting for about 30% of the monthly rise – while financial services, travel accommodation services, auto retailing and truck transportation of freight also rose.

Goods prices posted their biggest gain since January, rising 0.7%, with strong increases in the prices of vegetables, meat and eggs.

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"The PPI suggests inflation isn't the non-story some people thought it would be after Tuesday's CPI print," said Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley. "This doesn't slam the door on a September rate cut, but based on the market's initial reaction, the opening may be a little smaller than it was a couple of days ago."

PenFed Credit Union CEO James Schenk said that, "This morning's PPI report and the explosive miss to the high side vs. the forecast will reinforce the Fed's decision to 'wait and see.'"

"As a result, the markets are going to have to dig deep to see the world as it is – not how they want it to be. This portends higher rates and less of a likelihood of a Fed rate cut in September," Schenk added. "Once again, critics may also challenge the accuracy of the BLS quarterly numbers and forecasts."

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Chris Zaccarelli, chief investment officer for Northlight Asset Management, noted that the Federal Reserve will still get more inflation data – including PPI and CPI as well as the PCE inflation index – along with another jobs report ahead of its next interest rate decision in mid-September, but said it could reduce optimism around the outlook for a rate cut.

"The large spike in the producer price index (PPI) this morning shows that inflation is coursing through the economy, even if it hasn't been felt by consumers yet. Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a 'guaranteed' rate cut next month," Zaccarelli said.

The market reacted to the hotter-than-expected PPI report by paring back its outlook for the size and likelihood of the Fed cutting interest rates on Sept. 17.

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The probability of the Fed leaving the benchmark federal funds rate unchanged at the current range of 4.25% to 4.5% rose to 7.5% as of Thursday morning, up from 0% a day ago, according to the CME FedWatch tool. 

The likelihood of a 50-basis-point cut fell from 5.7% yesterday to 0% following the report, while the odds of a 25-basis-point cut declined slightly from 94.3% to 92.5% over the last day.

Reuters contributed to this report.