The cost of goods at the wholesale level dropped last month, and it was not a small dip.
That surprised forecasters, who had predicted no change at all.
The main culprit: gasoline. Food prices at the wholesale level also slipped 0.6%, and overall goods prices fell 1.4% - their biggest one-month drop since July 2022.
Strip out the volatile food and energy categories, and the picture gets a little trickier. Core PPI, which excludes those two, rose 0.2% in June. An even narrower measure that also removes trade services was up 0.1%.
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Even with the monthly drop, wholesale prices are still 5.5% higher than they were a year ago. Core PPI that excludes trade services is running at 5.1% annually.
The Consumer Price Index (CPI) - the more familiar measure of what regular people pay - fell 0.4% in June, with annual inflation at 3.5%. Core CPI, which strips out food and energy, was up 2.6% from a year ago.
Chris Rupkey, chief economist at Fwdbonds, put it this way: "The Fed's war with inflation isn't over by any means, … but there is good news from the front and the odds of Fed rate hikes should continue to recede as inflation at the factory level is trending lower, and producers will not be passing on their higher costs to the consumer level as much as we previously thought."
The catch: The Fed is not popping champagne yet. During a Tuesday appearance before House lawmakers, Federal Reserve Chair Kevin Warsh indicated that the June price drop does not signal the end of the inflation fight. The central bank's preferred gauge, the Personal Consumption Expenditures (PCE) price index, showed headline inflation at 4.1% and core at 3.4% in May - still well above the Federal Reserve's 2% goal.
While policymakers welcome the recent easing of wholesale costs, it does not ensure that consumer prices will also decline.
The next big moment for markets comes later this month, when the Commerce Department releases the June PCE report. That is the inflation measure the Fed watches closest.
Market participants continue to anticipate that the Fed will raise rates at some point this year, possibly as soon as September.
To understand the broader context: The Producer Price Index tracks what businesses pay for raw materials and intermediate goods, often serving as a leading indicator for consumer prices. Although the June wholesale decline is encouraging, the Fed's preferred gauge - the Personal Consumption Expenditures index - remains more than double the central bank's 2% target. Fed Chair Warsh's testimony reinforced that a single month of data does not signal a sustained trend, and the central bank will need to see consistent improvement across multiple reports before adjusting its policy stance.
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