A benchmark measure of inflation slowed in July after surging in the previous month, offering a glimmer of hope that the painful inflation Americans are facing could moderate in the coming months.
The Producer Price Index, which captures prices paid to producers for their goods and services, was 9.8% higher in July, compared with a year earlier. That’s a slowdown from a sharp 11.3% year-over-year spike in June, according to data released Thursday by the Bureau of Labor Statistics.
On a monthly basis, wholesale prices fell by 0.5%, down from a revised 1% month-over-month increase in June.
The report comes one day after the closely watched Consumer Price Index for July showed that the prices Americans pay for everything from food to electricity increased by 8.5% over the past year, a slower pace than the 9.1% increase in June.
“If you combine this with the Consumer Price Index news, which was certainly much more encouraging than would have been expected, this gives us hope that the worst of the inflation pressures are behind us,” said Mark Hamrick, senior economic analyst at Bankrate.
Largely attributed to a cooling-off of record-high energy prices, these lower numbers are generally seen as a sign of progress in the fight against inflation. However, economists warn that yet another hot inflation report sends a strong signal that the economy is not out of the inflationary woods yet.
Producer prices are generally more volatile than consumer prices, since cost fluctuations generally don’t get wholly passed through to consumers. But these expenses are partially reflected in what Americans pay for goods and services, and a high number is generally viewed as a harbinger of rising prices on consumer goods.
Eric Sterner, chief investment officer at Apollon Wealth Management, said falling wholesale prices bode well for consumers suffering sticker shock.
“This is definitely welcome news,” he said. “I think this is an even more valuable reading than CPI, because this is a leading indicator of what consumers will see in the future. We’re far from out of the woods, but we’re heading in the right direction.”
Energy moves the needle
The fall in sky-high energy prices gets much of the credit for the lower inflation readings. The BLS said July’s 1.8% drop in wholesale goods prices – the largest monthly decline since a lockdown-triggered plunge in April 2020 – is a function of lower energy prices. The agency also attributed 80% of the price decline in goods to a 16.7% drop in gasoline prices from June to July.
Prices at the pump hit a symbolic threshold on Thursday, falling below $4 a gallon for the first time since March. Nationwide, the average price for a gallon of gas was $3.99, according to AAA, which attributed at least some of the drop to cooling demand.
“What it reflects is that gasoline demand is maybe a little bit more elastic than people think,” said Stewart Glickman, energy equity analyst at CFRA Research, noting that Americans have been driving less in response to the rapid jump in prices at the pump in the spring and early summer.
Aside from gasoline, oil-related products ranging from jet fuel to diesel to petroleum-derived plastics play an enormous role in making and transporting goods of all kinds. For better or worse, oil prices have a more profound impact on prices than most people appreciate, Glickman said.
“The fact that anything you buy at the store or get shipped to you – someone is paying for the movement of those goods,” he said. “It works its way into the cost of lots of things that we consume. It’s influential beyond just when you roll up to the pump and need to fill up again.”
A needle for the Fed to thread
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