Key US inflation gauge cooled last month to the lowest level in nearly three years

Minneapolis (CNN) — Wholesale inflation continued its yearlong slowdown last month, rising by just 0.1% for the 12 months ended in June, according to the Bureau of Labor Statistics’ Producer Price Index released Thursday.

The PPI index, a key inflation gauge that tracks the average change in prices that businesses pay to suppliers, has cooled significantly since peaking at 11.2% in June 2022 and has now declined for 12 consecutive months. Annual producer price inflation is at its lowest level since August 2020, BLS data shows.

Economists were expecting an annual increase of 0.4%, according to Refinitiv.

On a monthly basis, prices increased by 0.1%.

Goods prices held steady for the month, after tumbling 1.6% in May, according to the BLS report. As such, prices for services — which increased 0.2% from May — were the primary driver behind June’s slight increase.

PPI is a closely watched inflation gauge since it captures average price shifts before they reach consumers and is a proxy for potential price changes in stores.

While the PPI doesn’t directly correlate into exactly what will come from the following month’s Consumer Price Index — a major inflation gauge that tracks price shifts for a basket of goods and services — it provides a look at whole economy inflation, minus rents, said Alex Pelle, Mizuho Securities US economist.

And that picture right now is looking pretty sharp.

“It’s definitely a good month for inflation,” Pelle told CNN. “You saw that in CPI, and now you’re seeing it in PPI.”

In June, inflation as measured by the CPI cooled to 3% annually, its lowest rate since March 2021, the BLS reported Wednesday.

An improving picture

Both the CPI and PPI have declined monthly since their peaks in June 2022, when record-high energy and gas prices fueled the spikes to 9.1% and 11.2%, respectively.

As such, the base effects of year-over-year comparisons are playing a part in the indexes’ sharp retreats.

Still, underlying inflation is showing a cooling trend as well — albeit more muted.

In the case of PPI, when stripping out the more volatile categories of food and energy, this “core” index rose 2.4% for the 12 months ended in June. That’s a step back from the 2.6% increase seen in May and economists’ expectations of 2.6%.

Core PPI, which ticked up 0.1% on a monthly basis, is at its lowest annual level since February 2021.

Lifting up the doves

Inflation is looking a heck of a lot better than last year, when the Federal Reserve embarked on a campaign to combat price hikes with rate hikes, but economists don’t expect the latest CPI and PPI prints will dissuade central bankers from giving another crank to tighten monetary policy.

Starting in March 2022, the central bank rolled out 10 consecutive interest rate hikes to tame inflation, finally hitting pause last month. The Fed is widely expected to raise rates by another quarter point when it meets later this month.

“[The June data] means that the doves are going to have a little bit better of an argument to hold sooner rather than later, so that does reduce the probability of a second hike this year,” Pelle said, noting the commonly used terms to describe Fed members’ differing monetary policy approaches.

Doves tend to favor looser monetary policy and issues like low unemployment over low inflation, while hawks favor robust rate hikes and keeping inflation low above all else.

But just how long a hold could last is another matter, said Pelle.

The job market is cooling from a scorching state, but it remains historically hot and tight. Considering ongoing demographic shifts (including the massive Baby Boomer generation aging out of the workforce), that tightness could continue, Pelle said.

“Do we really need to be cutting rates if you have GDP running around trend and the labor market still very tight,” he said. “Inflation is coming down, but the economy is maybe growing a little bit into these higher rate levels. So the hold could be longer than people expect. But we might have some of the sting out on getting even higher.”

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