What Producer Price Data Tells Us About the Fed's Next Move

Producer prices came in softer than expected in June, with the core PPI (excluding food and energy) up 4.7% year-over-year. That's below what economists were calling for. The headline number dropped mostly because gas prices fell 12%, but the interesting part is what happened under the surface.

Energy prices overall dropped 6.4% month-over-month. Food prices fell for the first time in three months after climbing most of the year on weather problems, war disruptions, and tariffs. Transportation and warehousing costs also pulled back, though trucking freight rates are still elevated because fuel costs remain high and there aren't enough drivers (immigration crackdowns tightened the labor pool).

This is the kind of report that gives the Fed breathing room. Between this and Tuesday's soft consumer price data, rate hike expectations for July got scaled back immediately. Treasury yields dropped, stock futures went up, and the market basically said "okay, maybe they don't need to move as aggressively."

But Fed Chairman Kevin Warsh warned against calling this a done deal. The Middle East conflict is heating up again, and if energy prices spike from here, this whole reprieve could evaporate pretty quickly.

One of the more useful parts of the PPI report is the intermediate demand section, which tracks prices earlier in the production process before they hit consumers. In June, processed goods prices for intermediate demand (ex food and energy) rose 0.6%, the smallest increase since the start of the year.

Plastic resins and materials, which go into basically everything, fell for the first time in 2026. That's significant because plastics are a leading indicator for consumer goods inflation. If input costs are cooling at this stage, it takes pressure off companies downstream.

Electronic components and accessories fell for a second month. Defense production costs dropped 2.2%. These aren't massive moves, but they're consistent with a broader cooling trend that started showing up in May and carried through June.

The question is whether this holds. The report covers June, which was before the latest flare-up in the Iran conflict. If oil prices spike again, a lot of these input costs are going to reverse, and the pipeline pressures come right back.

There's a section in the PPI report that tracks wholesale and retail trade margins, and it's gotten a lot of attention this year because it shows whether companies are eating tariff costs or passing them through to customers.

In June, margins rebounded after a big drop in May. That suggests companies pulled back on pass-through in May (probably testing price sensitivity), then pushed some costs back onto customers in June. This is the kind of back-and-forth you'd expect when businesses are trying to figure out how much pricing power they actually have.

The Supreme Court struck down a lot of Trump's tariffs earlier this year, but the administration is trying to find other ways to levy imports. The US also decided not to renew the long-term trade deal with Canada and Mexico, opting for annual reviews instead. That's going to create uncertainty for the next few months, and uncertainty usually means companies build in higher margins as a buffer.

Separate report on Wednesday: the New York Fed's Empire State Manufacturing Index picked up in July. New orders and shipments increased. Employment jumped to the highest level since December 2022, which is a pretty big move.

Prices paid by manufacturers eased but stayed elevated. The outlook for future prices (both paid and received) declined, which suggests factories think input cost pressures are going to moderate from here. That lines up with the PPI data showing cooling in intermediate demand.

But here's the thing: this is regional data from one district, and it's a survey of expectations, not actual transactions. It's useful for sentiment and direction, but it doesn't override what's happening in the actual price data.

The Fed's preferred inflation measure is the PCE price index, which comes out July 30. Some components of PPI feed directly into PCE, so this report gives a preview of where that number might land.

Airfares jumped 1.9% in June, which is inflationary. Portfolio management fees rose, but at a slower pace than in May. Those are two of the categories the Fed watches closely because they show up in services inflation, which has been stickier than goods inflation.

One economist quoted in the Bloomberg piece calculated that June PCE inflation will be firmer than the CPI report suggested, but probably still cool enough to keep the Fed on hold for the next few meetings. That's the base case right now: no July hike, probably no September hike unless something changes.

What could change it? Energy prices spiking from the Middle East conflict. Tariff uncertainty turning into actual new tariffs. The trade margin data showing companies are aggressively passing through costs again. Or just stickier services inflation that doesn't come down as fast as goods inflation did.

If you're trading indices or rate-sensitive sectors, the July 30 PCE report is the next key date. Between now and then, watch energy prices. If oil starts climbing again, the soft June PPI data becomes less relevant pretty quickly.

The trade policy stuff is harder to handicap because it's political and the administration's approach has been inconsistent. Annual reviews for the Canada-Mexico trade deal could mean anything from minor adjustments to significant disruptions depending on what leverage the US tries to use. That's uncertainty, and markets price uncertainty as risk premium.

The setup right now is basically: inflation pressures cooled in June, the Fed has room to wait, but there are multiple catalysts that could reverse the trend. It's not a clean "inflation is beaten" story. It's more like "inflation took a breather, let's see if it lasts."