Producer Price Index Flatlines, but Energy Clouds the Inflation Relief

Wholesale prices took a pause, then started climbing again

In July, the Producer Price Index gave the inflation outlook a rare bit of good news. The Bureau of Labor Statistics said final-demand producer prices did not change that month, while the consensus forecast had called for a 0.2% rise. June's reading was also revised to a 0.1% decline instead of the 0.3% drop first reported.31 Over 12 months, wholesale inflation slowed to 4.7% from 5.5% in June.3338 The report came one day after a consumer price index that showed a 0.1% monthly rise. Taken together, the two reports were the first stretch since the Iran war began in which pipeline price pressure seemed to be easing.3137

Two months later, that pause looks more like a lull than a turning point. Consumer data have since held up better than producer data, though, and that gap is now the main thing to understand ahead of the September CPI report on October 14 and the PPI report on October 15.518

Inside the July pause

Coverage agreed on what drove the flat reading. Goods prices fell 0.7%. Energy dropped 3.1%, including a 5.7% fall in gasoline, and food fell 0.9%. Services rose 0.2%, and much of that came from a 6.5% jump in portfolio management fees.3132 CNBC reported that core PPI, which excludes food and energy, rose 0.2% against a 0.3% forecast and was up 4.2% from a year earlier.31

The main disagreement was over the narrowest core measure. The index excluding food, energy and trade services rose 0.4%, and several outlets pointed to it as evidence that underlying pressure had not gone away.3235 IndexBox called that measure hotter than expected, with a 0.3% forecast. It argued that cooling consumer prices alongside firmer production costs meant businesses were struggling to pass costs on, which could squeeze profit margins.34 Some secondary coverage also conflicted on details. One outlet reported a 0.8% energy decline instead of 3.1%, and estimates of the spring peak in annual PPI ranged from 5.9% to 6.5%.3638 The BLS figures cited by most outlets, a 3.1% energy drop and 4.7% annual growth, are the ones to rely on.32

Economists mostly welcomed the report. Fwdbonds' Chris Rupkey said pressure at the early stages of production was not adding to consumers' inflation risk.31 Nationwide's Ben Ayers said input costs outside energy were cooling, though he called renewed fuel increases a concern.37 AP coverage also noted that consumer prices had risen faster than wages for four straight months, so the relief in the data was not yet showing up in household budgets.37

August brought energy back

Ayers' warning about fuel turned out to be right. Producer prices rose 0.4% in August, the most since May, and the annual rate jumped to 5.4%.4 Goods prices rose 1.1% after two monthly declines. Diesel surged 24.1% and accounted for nearly two-thirds of the rise in processed goods.3 Transportation and warehousing costs climbed 2.3%, a sign that fuel costs were spreading into services.3 BLS figures show final-demand energy up 24.4% over the year and transportation and warehousing services up 13.0%.6

The core numbers told a different story. PPI excluding food and energy rose only 0.2% in August, under the 0.3% forecast, though the annual core rate rose to 4.6%.1 Services prices outside trade, transportation and warehousing were unchanged.3 So the case for a broad-based return of inflation was weaker than the headline suggested.

Markets reacted to the headline anyway. CME FedWatch odds of a September rate hike rose to 71.4% from 61.2% after the report. Bank of America raised its estimate for August core PCE, saying a confirming CPI "should greenlight a hike."3 Treasury yields jumped, and stocks closed lower that day.10

The consumer side: headline up, core steady

August's CPI showed the same split. Prices rose 0.4% for the month and 3.4% over the year, while core CPI rose 0.3% for the month and 2.4% over the year.12 The monthly core reading was a little hotter than expected, and the New York Times said it made a rate hike more likely.12 At least one calendar service reported a 0.1% monthly headline figure. Most coverage, and the economic data aggregators, used 0.4%.201 Energy CPI was up 16.3% over the year, while food was up just 2.7%.14

The Fed raised rates by a quarter point on September 16, to a range of 3.75% to 4.00%, in a unanimous vote. Its statement said inflation "remains elevated," and 16 of 18 policymakers projected at least one more increase this year.17 Inflation has now been above the Fed's 2% target for five years, and Chair Kevin Warsh and Governor Christopher Waller have both voiced concern that it is persisting.3

Consumer spending changes the picture

The August personal income and outlays report gave the clearest sign of relief, though with some caveats. The PCE price index, the Fed's preferred measure, rose 0.3% for the month and 3.4% from a year earlier. Core PCE rose 0.2% and 3.0%.26 Economists polled by LSEG had expected 3.7% headline and 3.3% core, so both came in cooler.29

Much of that cooling came from revisions rather than new disinflation. The Bureau of Economic Analysis's annual update lowered July's headline PCE to 3.4% from 3.7% and core to 3.0% from 3.3%.29 One analysis said August looked cooler "mostly because of a statistical rule change."25 Fifth Third's Bill Adams said inflation was steady on the month, but the trend had been revised lower.29 In plain terms, the level of inflation is lower than first reported, but its direction hasn't clearly improved.

Spending was the bigger surprise. Nominal consumer spending rose 0.9%, or $190.8 billion, and real spending rose 0.6%. Personal income rose only 0.2%, and real disposable income was flat.26 The saving rate dropped to 4.1%.26 One account called the real spending gain the largest since March 2025 and linked part of it to stock-market wealth from the AI rally.25 The BEA also raised second-quarter GDP growth to 2.2% from 1.5%.25

This matters for the PPI story. If households are drawing down savings to keep spending, businesses have more room to pass costs on to them. That cuts against the July argument that companies would have to absorb higher input costs. A 0.9% spending gain does not fit the picture of consumers so price-sensitive that cost increases stall at the wholesale level. Fed officials have noted that this tension cuts both ways. Richmond Fed President Tom Barkin said weaker demand could help bring inflation down, because many consumer-facing companies report little ability to raise prices.34

What the week ahead is likely to show

Forecasters broadly agree on September's CPI. The Cleveland Fed's nowcast puts headline inflation at 3.60% for the year, with a 0.53% monthly gain, and core at 2.39% with a 0.20% monthly gain.13 The Street consensus is about 3.7%.1418 Most of the expected rise comes from gasoline. One model estimates a 10% seasonally adjusted jump in gasoline, partly because September seasonal factors assume pump prices will fall.17 MUFG expects core to slow to 0.2% and says another upside surprise in core would probably be needed to revive bets on a second straight hike in October.15

For September PPI, Trading Economics shows a 0.5% consensus after August's 0.4%.1 Retail sales come out the same day as PPI. They will show whether August's spending strength continued, ahead of the Fed's October 28 decision.5

Risks to the forecast lean toward higher readings. Airfares were up 23.4% over the year in August, diesel and delivery costs can reach services prices with a delay, and University of Michigan year-ahead inflation expectations rose to 4.6%.14 Ten-year Treasury yields above 5.2% show that bond investors are not convinced either.29

The bottom line

The July producer price report was real relief, but it lasted a month. Energy has dominated wholesale inflation in both directions all year, which makes headline PPI a poor guide to where inflation is heading. The more useful signal is core prices, and they have stayed fairly contained at the consumer level: 2.4% on CPI and 3.0% on revised PCE.1226 The main risk is not another fuel spike on its own. It is a fuel spike combined with consumers who are still spending more than their incomes are growing. If September's core readings stay at 0.2%, the Fed can treat the jump in headline inflation as an energy shock. If core comes in hotter, July's pause will look like a false dawn.