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Data from the BLS, chart by Mish.

The PPI Report for July was a bit of pleasant news this morning.

PPI Key Points

• The Producer Price Index for final demand increased 0.1 percent in July, seasonally adjusted. Final demand prices rose 0.2 percent in June and were unchanged in May.
• The July rise in the index for final demand can be attributed to prices for final demand goods, which moved up 0.6 percent. The price of food also jumped 0.6 percent.
• The index for final demand services fell 0.2 percent.
• Prices for final demand less foods, energy, and trade services advanced 0.3 percent in July after increasing 0.1 percent in June.

Last month I commented that food prices have likely bottomed and it looks that way this month with a 0.6 percent jump.

Services account for about two-thirds of the Producer Price Index (PPI) for Final Demand.

This explains why the PPI only rose 0.1 percent despite a rise in PPI goods of 0.6 percent.

Final Demand Goods Details

• Prices for final demand goods rose 0.6 percent in July, the largest advance since a 1.1-percent jump in February.
• Nearly 60 percent of the broad-based increase in July can be traced to the index for final demand energy, which moved up 1.9 percent.
• A quarter of the July rise in the index for final demand goods is attributable to a 2.8-percent advance in prices for gasoline.
• Prices for final demand goods less foods and energy and for final demand foods also rose, 0.2 percent and 0.6 percent, respectively.
• The price for electric power decreased 1.1 percent. The indexes for fresh and dry vegetables and for steel mill products also moved down.

Final Demand Services Detail

• Prices for final demand services fell 0.2 percent in July, the largest decrease since moving down 0.2 percent in March 2023.
• The July decline can be traced to the index for final demand trade services, which dropped 1.3 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.)
• In contrast, prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services rose 0.3 percent and 0.4 percent, respectively.
• Leading the July decline in prices for final demand services, margins for machinery and vehicle wholesaling decreased 4.1 percent. The indexes for food and alcohol retailing, automobiles retailing (partial), automotive fuels and lubricants retailing, desktop and portable device application software publishing, and physician care also fell.
• Prices for portfolio management advanced 2.3 percent. The indexes for chemicals and allied products wholesaling and for truck transportation of freight also rose.

PPI Final Demand Year-Over-Year

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PPI Final Demand Year-Over-Year Five Ways

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PPI Final Demand Year-Over-Year Key Details

• PPI final demand services fell from 3.5 percent in June down to 2.6 percent in July.
• The decline in services in July also helped bring down the year-over-year overall PPI from 2.7 percent to 2.2 percent.
• Final demand goods year-over-year rose from 1.3 percent to 1.7 percent.
• Final demand for energy (not shown) is up 0.3 percent from a year ago. I don’t chart energy because it blows the scale. In June of 2022, energy was up 52.9 percent and in June of 2023 energy was down 23.9 percent.
• Final demand less food and energy is up 2.4 percent, down from 3.0 percent last month.
• Final demand food is up 0.6 percent from a year ago vs down 0.7 percent in April.

The Fed Will Be Pleased

The Fed’s big concern is services, not energy or goods. In response to the PPI report the odds of a 50 basis point rate cut in September rose slightly from 50.0 percent yesterday to 54.5 percent today.

Expect more volatility in response to the CPI report Tomorrow, August 14.

What the Fed really needs is for the price of consumer rent to decline (a CPI item). The consensus expectation for the CPI is 0.2 percent.

I’ll take the under at 0.1 percent and would not at all be surprised by a flat CPI.

I expect the Fed will cut 50 basis points in September. We will have another CPI report on September 11. The Fed meets on September 18.

I am confident year-over-year CPI will decline substantially before the Fed next meets.

Recession Has Started

Very few see this yet, but I am convinced a recession has already started.

For discussion, please see my August 2, 2024 post The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered.

I did a follow-up post on August 9, Recession Debate: Citing the Sahm Rule, WSJ’s Greg Ip Says No Recession

Greg Ip says the conditions for recession are not in place. I disagree. And I show where and how he went wrong.

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