The Producer Price Index (PPI) year-over-year inflation contraction moderated from -0.8 % to -0.4 %.

Analyst Opinion of Producer Prices

Year-over-year inflation pressures remain soft as this index remains in contraction. This may be the beginning of a deflationary cycle - we will know only in hindsight.

Here is what the BLS said in part:

The Producer Price Index for final demand increased 0.6 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed a 0.2-percent decline in June and a 0.4- percent advance in May. (See table A.) The July increase is the largest rise since a 0.7-percent advance in October 2018. On an unadjusted basis, the final demand index moved down 0.4 percent for the 12 months ended in July. In July, the advance in the final demand index was led by a 0.5-percent rise in prices for final demand services. The index for final demand goods also moved higher, increasing 0.8 percent. Prices for final demand less foods, energy, and trade services advanced 0.3 percent in July, the same as in June. For the 12 months ended in July, the index for final demand less foods, energy, and trade services edged up 0.1 percent, following three straight 12-month declines.

The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

The market had been expecting (from Econoday):

The producer price inflation breakdown:

In the following graph, one can see the relationship between the year-over-year change in the intermediate goods index and finished goods index. When the crude goods growth falls under finish goods - it usually drags finished goods lower.

Percent Change Year-over-Year - Comparing PPI Finished Goods (blue line) to PPI Intermediate Goods (red line)

Econintersect has shown how pricing change moves from the PPI to the Consumer Price Index (CPI).

Comparing Year-over-Year Change Between the PPI Finished Goods Index (blue line) and the CPI-U (red line)

The price moderation of the PPI began in September 2011 when the year-over-year inflation was 7.0%.

Caveats on the Use of Producer Price Index

Econintersect has performed several tests on this series and finds it fairly representative of price changes (inflation). However, the headline rate is an average - and for an individual good or commodity, this series provides many sub-indices for a specific application.

A very good primer on the Producer Price Index nuances can be found here.

Because of the nuances in determining the month-over-month index values, the year-over-year or annual change in the PPI index is preferred for comparisons.

There is a moderate correlation between crude goods and finished goods. Higher crude material prices push the finished goods prices up.