US Producer Prices unexpectedly drop in June

US producer prices (PPI) unexpectedly fell in June, adding to signals that inflation was retreating during the period of ceasefire before the latest escalation in the Middle East conflict.

The Producer Price Index increased 5.5% y/y in June after rising 6.0% in May and strongly beat consensus for 6.2% increase, while monthly PPI dropped 0.3% last month after increasing 0.6% in May.

The major contributor to upbeat June numbers was decline in goods prices by 1.4% (the largest drop in four years), pressured by a 6.4% drop in the cost of energy products, along with 0.6% drop in wholesale food prices.

The short-lived ceasefire between the United States and Iran collapsed last week, with renewed hostilities lifting oil prices to the highest in one month and fueling worries that inflation may rally again.

The report released on Tuesday showed 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 drop in energy prices, slowed the annual increase in consumer inflation to 3.5% from 4.2% in May.

The latest reports contribute to overall inflation outlook and come ahead of release of Personal Consumption Expenditures Price Index, Fed’s preferred inflation gauge, which, according to the latest economists’ forecasts, is expected to have risen by 0.3% m/ in June vs 0.4% rise in May, with annualized PCE expected at 3.3% in June vs 3.4% previous month.

The US central bank policymakers will meet later this month with wide expectations in the market to keep benchmark overnight interest rate unchanged in the 3.50%-3.75% range, though with quite high bets for a rate hike in September.

The notion is supported by the fact that inflation in the US remains above 2% target since early 2021, with the Fed’s stance for no tolerance for persistently elevated inflation.