U.S. wholesale prices were unchanged in July, coming in below economists' expectations and adding to evidence that inflation pressures may be easing enough for the Federal Reserve to leave interest rates unchanged at its next meeting. The Bureau of Labor Statistics report also showed underlying producer prices rising less than forecast, prompting traders to increase bets on a Fed hold.
The producer price index, or PPI, was flat from June, compared with the increase expected in the Dow Jones consensus estimate. Core PPI, which excludes the more volatile food and energy categories, rose 0.2%, below the 0.3% increase economists had anticipated.
Inflation remained elevated when measured against a year earlier. The headline PPI was 4.7% higher than in the same month a year ago, while the core measure increased 4.2%, underscoring the Fed's challenge as policymakers weigh encouraging short-term trends against still-high annual inflation.
Markets responded by increasing expectations that the central bank will stand pat. CME Group's FedWatch tool showed the probability of the Fed maintaining its benchmark rate rising to 67.9%, from 59.4% Wednesday. The implied probability of an increase to a 3.75%-to-4% range fell to 32.1% from 40.6%.
The wholesale-price report followed similarly restrained consumer inflation data released Wednesday by the Bureau of Labor Statistics. Headline consumer prices increased 0.1% in July, while core inflation advanced 0.2%, both in line with expectations.
On an annual basis, headline consumer inflation stood at 3.4%, while the core rate was 2.5%. Both remain relevant to the Fed's policy debate because inflation continues to run above the central bank's 2% target even as monthly readings suggest price pressures aren't accelerating sharply.
The combination of the consumer and producer reports gives Fed officials another month of relatively benign near-term inflation data. A second consecutive month of modest increases could support officials who favor waiting for additional evidence before tightening monetary policy further.
The Federal Open Market Committee voted 9-3 in July to keep the federal-funds target range at 3.5% to 3.75%. The three dissenters-Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan-favored a quarter-percentage-point increase.
Federal Reserve Chair Kevin Warsh must now navigate that divide as policymakers assess whether July's softer readings represent a durable cooling in inflation or merely a temporary respite. The latest data could make an immediate increase harder to justify, though annual producer-price inflation remains well above levels consistent with a complete victory over price pressures.
Hammack has argued that a single quarter-point increase might have limited economic impact and suggested that additional tightening could ultimately be necessary.
"In general, one 25 basis point move probably doesn't do a whole lot for the economy," Hammack told Yahoo Finance.
"So it's probably some number of [movements]. But I don't want to prejudge what that number is going to be," she added, saying she doesn't "know exactly where we will end."
Kashkari has similarly favored acting sooner rather than waiting for inflation pressures to force a more aggressive response. He has argued that a "potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary."
