Advisors monitoring wholesale inflation received a measure of relief on Thursday as the Bureau of Labor Statistics reported that the Producer Price Index for final demand was unchanged in July. That reading came in below the 0.2% advance that economists polled by Dow Jones Newswires and the Wall Street Journal had anticipated. June's figure was also revised to a 0.1% decline from an initially reported 0.3% drop, signaling that pipeline price pressures are continuing to ease.
The flat headline number masked divergent trends beneath the surface. A 0.2% increase in the index for final demand services and a 2.2% jump in construction prices helped offset a 0.7% slide in goods prices, which were dragged down by falling energy and food costs. Core PPI, which strips out volatile food and energy components, rose 0.2% in July—just shy of the 0.3% forecast. That moderation, while welcome, was not uniform across all inputs.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, noted that the softer headline was driven by lower energy and food prices, but he flagged a specific component of core PPI that feeds into the calculation of the Federal Reserve's preferred inflation gauge, the core PCE index. That subcomponent rose sharply in July, a development that could keep the central bank cautious. “Even so, the July CPI and PPI reports collectively keep a narrow path open for the Fed to hold rates steady at the next decision in September,” Adams said.
The PPI release follows Wednesday's consumer price index report, which matched expectations and showed inflation easing to an annual rate of 3.4%. Together, the two reports give Fed officials a mixed picture: while headline inflation is cooling, underlying price pressures in services and construction remain sticky. That nuance is likely to be central to the debate at the Federal Open Market Committee's September meeting, where policymakers must weigh the risk of overtightening against the possibility that inflation proves more persistent than hoped.
Katie Klingensmith, chief investment strategist at Edelman Financial Engines, said in a note released after the CPI data that the Fed would be watching PPI for signs of pipeline inflation—price increases that have not yet reached consumers. She argued that a PPI reading in line with expectations and continuing to moderate from recent months would ease pressure on the Fed to tighten further and “delay any immediate test of the central bank's credibility.” Thursday's data largely delivered on that front, though the firmness in core components suggests the disinflationary trend is not yet fully entrenched.
The Fed's policy stance has been under scrutiny since its last meeting, where the committee, now chaired by Kevin Warsh, voted to hold the federal funds rate steady. That decision was not unanimous, with three dissenting members favoring a hike to the 3.75%–4% range. The latest inflation data may bolster the case for patience, but the dissents highlight the internal divisions over how aggressively to combat price pressures.
Market pricing reflects the uncertainty. According to the CME FedWatch tool, which updates in real time, the probability of rates remaining unchanged at the September meeting stood at 65.6% on Thursday afternoon, up from 55.9% on Wednesday morning. The implied likelihood of a quarter-point hike to between 3.75% and 4% was 34.4%. The shift suggests that traders see the flat PPI as reducing, but not eliminating, the odds of a move.
For advisors, the takeaway is that the Fed's path remains data-dependent, and the upcoming labor market reports and other economic indicators will be critical. The July CPI data already showed some cooling, but the persistence of services inflation could keep the Fed on edge. As the September meeting approaches, the central bank will be parsing every data point for signs that price pressures are truly abating.
In the broader context, the flat PPI is a positive signal for those hoping the Fed can achieve a soft landing—bringing inflation down without triggering a recession. But the mixed internals, particularly the rise in construction costs and the firm core PPI components, serve as a reminder that the battle against inflation is not yet won. Advisors should prepare clients for the possibility that the Fed may need to keep rates higher for longer if price pressures re-emerge.
