Inflation as measured by producer wholesale prices slowed to 9.8% for the year ending in July, according to a report Thursday from the Bureau of Labor Statistics.
That year-over-year inflation rate was down from 11.3% the month before and lower than forecasters expected. On a month-to-month basis, the producer price index declined by 0.5%.
The July wholesale numbers mark the first monthly decline since April 2020 at the start of the pandemic, and the annual increase is the lowest since October of last year.
“Cooling prices paid by producers portend a further cooling for consumer prices, as producer prices are further up the inflation pipelines. We expect producer prices to ease as supply chains improve,” said Jeffrey Roach, chief economist for LPL Financial. “It could take up to three months for improved supply chains to affect prices for the end consumer.”
INFLATION EXPECTATIONS TUMBLE AS FED GEARS UP FOR MORE RATE HIKES
The better-than-expected PPI report comes just a day after the much-anticipated consumer price index report for July was released. The CPI report showed inflation slowed to 8.5% for the 12 months ending in July thanks to lower energy prices — down from the 9.1% registered in June.
So-called core CPI, which strips out volatile food and energy prices, increased by 0.3% in July, slightly more than expected. The figure shows that inflation is still a huge concern for the Federal Reserve and for the average consumer.
Both inflation reports might show that the higher prices are beginning to crest, although the readings are still well above the Fed’s goal of steady 2% inflation. In response, the central bank has begun hiking interest rates in the most aggressive fashion in decades.
In July, following a two-day meeting, central bank officials announced that the Fed would increase its interest rate target by three-quarters of a percentage point. That follows another 75 basis point hike in June. The Fed usually hikes rates by just a quarter of a percentage point, so the back-to-back increases were equivalent to six standard rate hikes in just two months.
“Bottom line is the inflation is still high, but it looks like it’s coming down and because it’s high … the Fed is likely to continue raising interest rates pretty aggressively, so that will cool the economy,” Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner.
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The Fed is set to meet in September, when it is expected to conduct another big rate hike. The question is now whether it will do another 75 basis point raise or opt for a still-large half percentage point hike.
Investors are now pegging the odds of a three-quarters hike at just over 34% and pricing in about a 65% chance of a 50 basis point hike, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
