U.S. producer prices rise by 0.9% month-on-month in July

Investing.com - U.S. producer prices rose at a faster-than-anticipated rate in July as a tariff-fueled jump in goods was joined by the biggest advance in the cost of services in more than three years, muddying the outlook for a possible upcoming Federal Reserve interest rate cut.

A chunk of the 1.1% jump in the index for final services demand for the month was fueled by a rise in expenses for machinery and equipment wholesaling, according to figures from the Bureau of Labor Statistics. The indices for portfolio management, securities brokerage, traveler accommodation, and freight transportation also advanced.

Final demand goods, meanwhile, moved up by 0.7%, the largest increase since January, with roughly a quarter traced back to higher prices for fresh and dry vegetables. Prices for gasoline, on the other hand, decreased.

Stripping out volatile items like food and fuel, the measure rose by 0.4%, after a 0.9% gain in June, while a climb in passenger car costs eased to 0.1% from 0.3%. But home electronic equipment costs surged by 5% versus the prior month, while sporting and athletic items -- seen as particularly exposed to elevated U.S. levies -- increased by 1.2%

Analysts had been curious to see if goods inflation, especially for items like furniture, apparel and toys that are viewed as susceptible to the duties, would be offset by what have been recently muted services costs.

The producer price index for final demand increased by 0.9% on a monthly basis in July, accelerating after it was unchanged in June. In the twelve months to July, the figure came in at 3.3%, speeding up from 2.4%. It was the largest such uptick since February.

Economists had predicted readings of 0.2% and 2.5%, respectively.

"July PPI came in hot," said Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, in a post on X. Jones noted that Treasury yields are up "as the Federal Reserve needs to weight this against a softening labor market."

A weak July jobs report, as well as tepid consumer price data released earlier this week, have spurred on expectations that the Fed will slash borrowing costs at its September meeting. It would be the first drawdown by the central bank since it paused its policy easing cycle last December.

Investors are now widely pricing in a 25-basis point reduction after the Fed’s September 16-17 gathering. Treasury Secretary Scott Bessent, meanwhile, has called for an even deeper half-point cut due partially to sharp downward revisions in job growth in June and May.

In a note, analysts at Capital Economics estimated that, with the consumer price data and PPI in hand, the core personal-consumption expenditures deflator is now at 0.32% month-over-month, "implying that the three-month annualized rate jumped back up to 3.2%, from 2.7%." The Fed factors in these numbers as it deliberates over policy actions.

"Nonetheless, with almost 0.1%-point of the monthly gain reflecting the one-off surge in the portfolio management PPI, it probably won’t have much influence on the Fed’s decision on whether to cut in September," said Stephen Brown, Deputy Chief North America Economist at Capital Economics.

Brown added that the "more concerning development" revolves around indications that "services prices might be accelerating."