US producer prices post largest drop in 14 months; inflation risks still tilted to the upside

Producer prices unexpectedly fell in June, posting their biggest decline in 14 months amid a pullback in the cost of energy products, further evidence that inflation was subsiding before the recent escalation in the Middle East conflict. The report from the Labor Department on Wednesday also showed a sharp downward revision to the Producer Price Index data for May, and followed news on Tuesday of a larger-than-expected drop in the monthly Consumer Price Index last month. The data, together with a slowdown in job growth in June, effectively ruled out an interest rate increase from the Federal Reserve this month. The reports have, however, been overtaken by the renewed hostilities between the United States and Iran following last week's collapse of a fragile ceasefire. Oil prices have climbed to a one-month high after Washington reimposed a naval blockade of Iran. The PPI report also showed further price gains related to the artificial intelligence build-out, a concern for officials at the U.S. central bank. These factors keep a rate hike this year on the table, economists said. "There's no near-term pressure on the Fed, but oil is in the driver's seat over the longer term," said David Russell, global head of market strategy at TradeStation. "Energy saved the day in June, but that might become ancient history if the Strait of Hormuz doesn't open soon." The government reported on Tuesday that the Consumer Price Index dropped 0.4% in June, the largest decline since April 2020, after increasing 0.5% in May. The decrease, which mostly reflected a decline in energy prices, slowed the annual increase in consumer inflation to 3.5% from 4.2% in May. With the PPI and CPI data in hand, economists estimated that core PCE inflation rose 0.2% in June after climbing 0.3% in May. That would translate into a 3.3% year-on-year increase in core PCE inflation after rising 3.4% in May. "Our base case is that inflation will ease in the back half of 2026, but we see the balance of risks as tilted to the upside," said Oren Klachkin, financial markets economist at Nationwide. "For one, oil prices inflecting higher in recent days means energy could exert renewed upward pressure that also filters into the rest of the inflation basket." Financial markets expected the Fed to keep its benchmark overnight interest rate unchanged in the 3.50%-3.75% range at the July 28-29 meeting. Traders, however, continued to see a rate hike in September. Fed Chairman Kevin Warsh told lawmakers on Wednesday that he felt the central bank was not meeting its price stability mandate, but declined to give any color on how or when he would address the issue. Stocks on Wall Street traded higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell. Excluding food and energy, the core goods PPI gained 0.2% after increasing 0.7% for two straight months. Despite the moderation in the so-called core goods inflation, there were further AI-related price increases, with the cost of electronic computers and computing equipment surging 2.5% during the month. The cost of wholesale services rebounded 0.2% after dipping 0.1% in May. A 0.4% increase in trade services, which measures margins received by wholesalers and retailers, accounted for more than 60% of the rise in services. There were also rises in prices for furniture retailing, apparel, jewelry, footwear and accessories retailing as well as loan services and hospital inpatient care. Prices for securities brokerage, dealing and investment advice increased, with portfolio management fees rising 0.5%. But airline fares fell 0.4%, while hotel and motel room prices dropped 1.0%. They are among some of the components that go into the calculation of the Personal Consumption Expenditures Price Indexes tracked by the Fed for its 2% inflation target. The Producer Price Index for final demand dropped 0.3% last month, the biggest decline since April 2025, after a downwardly revised 0.6% increase in May, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1% gain in May. The BLS said PPI data from February through May had been revised to reflect the "availability of late reports and corrections by respondents." In the 12 months through June, the PPI increased 5.5% after rising 6.0% in May. A narrower measure of the PPI, which excludes food, energy and trade, edged up 0.1% over the month and advanced 5.1% on a year-on-year basis. A 1.4% decline in goods prices, the largest since July 2022, accounted for the decrease in the PPI over the month. Goods prices increased 2.3% in May. They were in June weighed down by a 6.4% drop in the cost of energy products, which followed an 8.4% jump in May. Gasoline prices tumbled 12%, accounting for nearly two-thirds of the drop in goods prices. The cost of natural gas decreased 6.4%, but residential electricity prices rose 0.7%. There were also decreases in the prices of crude petroleum as well as thermoplastic resins and materials. The truce between the U.S. and Iran was shattered after commercial tankers came under fire in the Strait of Hormuz, a vital route for global oil supplies, that has become one of the main battlegrounds of the conflict. Wholesale food prices fell 0.6%, with the cost of fresh fruits and melons declining 2.2%. Fresh and dried vegetable prices dropped 6.0%, while the cost of grains plunged 12.0%. There were also decreases in the prices of eggs, oil seeds, beef, pork and poultry.

US producer prices post largest drop in 14 months; inflation risks still tilted to the upside

Producer prices fall unexpectedly in June

CPI data points to softer core PCE inflation

Core services and AI-related prices remain firm

Goods and food prices drive the monthly decline

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