US producer prices unexpectedly fall in June

Federal Reserve Board building in Washington / Reuters-Yonhap

WASHINGTON — U.S. producer prices unexpectedly fell in June, another indication that inflation was retreating before the recent escalation in the Middle East conflict. The Producer Price Index (PPI) for final demand dropped 0.3 percent last month after a downwardly revised 0.6 percent increase in May, the Labor Department's Bureau of Labor Statistics said on Wednesday.

Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1 percent advance in May. In the 12 months through June, the PPI increased 5.5 percent after rising 6.0 percent in May.

A 1.4 percent decline in goods prices, the largest since July 2022, accounted for the decrease in the PPI over the month. Goods prices were weighed down by a 6.4 percent drop in the cost of energy products. Wholesale food prices fell 0.6 percent. Prices for services rose 0.2 percent.

The ceasefire between the United States and Iran collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran. Oil prices rose to a four-week high after Washington reimposed a naval blockade of Iran.

The government reported on Tuesday that the Consumer Price Index dropped 0.4 percent in June, the largest decline since April 2020, after increasing 0.5 percent in May. The decrease, which mostly reflected a decline in energy prices, slowed the annual increase in consumer inflation to 3.5 percent from 4.2 percent in May.

The Federal Reserve (Fed) tracks the Personal Consumption Expenditures (PCE) Price Indexes for its 2 percent inflation target.

Prior to the PPI data, economists estimated that PCE inflation excluding the volatile food and energy components rose 0.2 percent in June after climbing 0.3 percent in May. That would translate into a 3.3 percent year-on-year increase in the so-called core PCE inflation after rising 3.4 percent in May.

Financial markets expected the U.S. central bank to keep its benchmark overnight interest rate unchanged in the 3.50-3.75 percent range this month. Traders, however, continued to see a rate hike in September. Inflation was last below 2 percent in early 2021. Fed Chair Kevin Warsh told lawmakers on Tuesday that the central bank had "no tolerance for persistently elevated inflation."