US Producer Prices Fall For First Time In 2 Years: What Investors Need To Know

U.S. producer prices fell last month for the first time since early 2020 on the back of lower energy costs.

What Happened: The producer price index fell 0.5% in July, the U.S. Bureau of Labor Statistics reported Thursday. Average economist estimates were calling for an increase of 0.2%.

The decline comes after the producer price index jumped 1% in June and 0.8% in May. On an annual adjusted basis, the index rose 9.8%, the lowest rate seen in nearly a year. 

The index gauges the prices received for final demand products. The decrease in the index is attributable to a 1.8% decline in prices for final demand goods. Final demand services jumped 0.1%. 

With food, energy and trade services removed from the index, core producer prices increased 0.2% in July, which follows a 0.3% increase in June. On an annual adjusted basis, the core producer price index increased 5.8%.

Related Link: CPI Inflation Slows To 8.5% In July, Stocks Rip Higher — But Are Wages Keeping Up?

Why It Matters: The better-than-expected producer price index number comes just a day after the consumer price index showed that inflation was flat last month and up 8.5% year-over-year, another potential sign that inflation may be cooling down.

The headline CPI jumped 8.5% in July, which beat average economist estimates of 8.7%, and was down from 9.1% in June. Core inflation jumped 5.9% in July, which came in below average economist estimates for an increase of 6.1%.

One declining print doesn't make a trend, but it's a good start and the better-than-expected producer prices are another sign that things are moving in the right direction. 

Quadratic Capital Management's Nancy Davis on Wednesday said the CPI reading was likely a big relief for the Federal Reserve, as the central bank battles the highest inflation numbers seen in more than 40 years. 

"If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening, and if the market starts to price in fewer rate hikes, we expect the yield curve to steepen," Davis said.

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