U.S. producer prices fall in June as inflation pressures ease before Middle East oil shock

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U.S. producer prices fall in June

Highlights

The Producer Price Index for final demand falls 0.3% in June, driven by a 6.4% drop in energy product costs and 0.6% fall in wholesale food prices.
Annual producer price inflation slows to 5.5% in June from 6.0% in May, while the Consumer Price Index declines 0.4% for the month, the largest drop since April 2020.
Escalating U.S.-Iran tensions lift oil to a four-week high, adding inflation risk as markets expect the Fed to keep rates at 3.50%–3.75% this month but price in a September hike.

June producer price data and inflation signals

As reported by Reuters, citing the U.S. Labor Department's Bureau of Labor Statistics, the Producer Price Index for final demand falls 0.3% in June after a downwardly revised 0.6% increase in May. Economists polled by Reuters expect the index to be unchanged after the previously reported 1.1% rise in May.

On an annual basis, producer prices rise 5.5% in the 12 months through June, slowing from 6.0% in May. A 1.4% drop in goods prices, the biggest since July 2022, drives the monthly decline, led by a 6.4% fall in energy product costs. Wholesale food prices fall 0.6%, while services prices rise 0.2%.

The government also reports that the Consumer Price Index drops 0.4% in June after rising 0.5% in May, marking the largest decline since April 2020. That move, largely tied to lower energy prices, slows annual consumer inflation to 3.5% from 4.2% in May.

Fed outlook and Middle East market risks

The inflation slowdown comes before a renewed escalation in the Middle East adds uncertainty to the price outlook. The ceasefire between the United States and Iran collapses last week after commercial tankers come under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran, while oil prices rise to a four-week high after Washington reimposes a naval blockade of Iran.

The Federal Reserve continues to track the Personal Consumption Expenditures Price Index for its 2% inflation target. Before the producer price report, economists estimate that core PCE inflation, which excludes food and energy, rises 0.2% in June after a 0.3% gain in May, translating into a 3.3% year-on-year increase after 3.4% in May.

Financial markets expect the U.S. central bank to keep its benchmark overnight interest rate unchanged in the 3.50% to 3.75% range this month, though traders continue to price in a September rate hike. Fed Chair Kevin Warsh tells lawmakers on Tuesday that the central bank has no tolerance for persistently elevated inflation.

In our earlier article on the June U.S. CPI slowdown, we noted that cooler year-on-year inflation and a sharp monthly dip led markets to dial back expectations for a near-term Federal Reserve rate hike. We also highlighted that policymakers, including Fed Chair Kevin Warsh, still wanted several more months of supportive data before concluding that inflation pressures are firmly under control.

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