US July PPI Rises 4.7% Year-on-Year, Strengthening September Fed Rate Hold Argument

[Mexico City = Shim Young-jae, Correspondent] The US Producer Price Index (PPI) for July remained unchanged at 0% compared to the previous month, a figure lower than market expectations. The decline in commodity prices, particularly in energy and food, significantly influenced this outcome. In contrast, service prices and indicators showing underlying price pressures increased. Analysts suggest that while the Federal Reserve (Fed) may lean towards employment slowdown over inflation in its September rate decision, it is also difficult to conclude that inflation concerns have completely dissipated.

According to the US Bureau of Labor Statistics (BLS), the final demand PPI for July, released on the 13th (local time), recorded the same level as the previous month. It had decreased by 0.1% in June and increased by 0.5% in May. The July PPI rose by 4.7% compared to the same month last year, a slowdown from June's 5.5% increase.

The market had anticipated a 4.9% year-on-year increase in the July PPI. The lower-than-expected July PPI has bolstered expectations that the Fed may maintain its benchmark interest rate at the September meeting, following recent weakness in the labor market and a gradual trend in consumer prices.

Decline in Commodity Prices Pressures PPI...Gasoline Plummets 5.7%

The primary reason for the overall PPI remaining unchanged is the decline in commodity prices.

According to the BLS, the final demand commodity prices fell by 0.7% in July. This marks a second consecutive month of decline following a 1.4% drop in June. Notably, energy prices fell by 3.1%, pulling down commodity prices. Food prices also decreased by 0.9%. Excluding food and energy, commodity prices rose by 0.1%.

In detail, the impact of energy prices was significant. Gasoline prices dropped by 5.7%. The BLS noted that the decline in gasoline prices accounted for more than half of the decrease in final demand commodity prices. Prices for fresh and dried vegetables, diesel, jet fuel, residual fuel oil, thermoplastic resins, and materials also fell.

Conversely, some items moved in the opposite direction. Prices for automobiles and automotive equipment rose by 0.3%. Electricity and grain prices also increased. Thus, it was not a broad-based weakening of commodity prices; rather, the declines in energy and some food items significantly dragged down the overall index.

Reuters pointed out that the PPI survey is primarily conducted at the beginning of the month. There is a possibility that the sharp rise in international oil prices observed at the end of July was not sufficiently reflected in this producer price index. Therefore, it may be premature to conclude that the risk of energy-driven inflation has been resolved based solely on the July figures.

Services Rise by 0.2%...Portfolio Management Soars 6.5%

In contrast to commodity prices, service prices increased.

According to the BLS, the final demand service prices rose by 0.2% in July, following a 0.5% increase in June. The rise in service prices, excluding trade and transportation/warehousing, which increased by 0.6%, led to the overall increase in service prices. However, transportation and warehousing service prices fell by 1.8%, and trade services also decreased by 0.1%.

Among service categories, portfolio management prices surged by 6.5%. Retail margins for health, beauty, and eyewear products, as well as for automobiles and auto parts, also increased. Retail and wholesale margins for lawn, garden, and agricultural equipment and supplies, as well as food and alcoholic beverages, rose as well.

On the other hand, freight truck transportation prices fell by 1.8%. Indices related to machinery, automobile wholesale, and securities brokerage, dealing, and investment advisory also declined.

Construction costs also pushed prices higher. Final demand construction prices rose by 2.2% in July. While commodity prices fell by 0.7%, services rose by 0.2%, and construction increased by 2.2%, the overall final demand PPI remained at 0% compared to the previous month.

Indicators showing the underlying trend of prices presented a different picture. Excluding food, energy, and trade services, final demand prices rose by 0.4% in July, compared to a 0.1% increase in June. This indicator also rose by 4.7% compared to the same month last year. Although the headline PPI was lower than expected, it is difficult to conclude that underlying price pressures have disappeared.

Strengthening the Fed's September Decision...Energy Prices as a Variable

According to Reuters, this PPI, along with recently released employment and consumer price indicators, has strengthened the basis for the Fed to hold its benchmark interest rate at the Federal Open Market Committee (FOMC) meeting on September 15-16. The Fed maintained the benchmark interest rate at 3.50-3.75% during the July meeting.

The Fed uses the Personal Consumption Expenditures (PCE) price index rather than the PPI itself as a core indicator for its 2% inflation target. According to market forecasts prior to the PPI announcement reported by Reuters, the core PCE, excluding food and energy, was expected to rise by 0.2% in July compared to the previous month. The June increase was 0.1%. The year-on-year increase in core PCE was projected to remain at 3.3%, the same as in June.

Therefore, the signals shown by this PPI cannot be interpreted in one direction only. The headline producer price index was weaker than market expectations. The year-on-year increase rate also decreased from 5.5% to 4.7%. Commodity and energy prices also fell significantly.

In contrast, service prices increased. The core inflation rate, excluding food, energy, and trade services, rose by 4.7% year-on-year and 0.4% month-on-month. Notably, portfolio management costs surged.

Peter Schiff, Chief Economist at Euro Pacific Asset Management, also cautioned against the effects of energy prices. On the 13th, Schiff stated on X (formerly Twitter) that although this PPI came out better than expected, it holds little significance for judging future inflation. He noted that while average monthly energy prices have fallen, energy prices at the end of the month have risen sharply.

This aligns with the issue raised by Reuters regarding the timing of the PPI survey. If the rise in oil prices at the end of July was not adequately captured in this indicator, it cannot be ruled out that energy price pressures may re-emerge in future producer prices.

The July PPI signaled that the price pressures at the production stage in the US have not accelerated immediately. However, this was accompanied by a significant drop in energy prices, including gasoline. At the same time, service and core prices have risen. The Fed now faces the challenge of balancing between employment slowdown, lower headline prices, and still high underlying inflation ahead of its September meeting.