Wholesale prices decline 0.5 percent as inflation eases in July

Wholesale prices dropped 0.5 percent in July to hit a 9.8 percent annual increase, down from an 11.3 percent annual increase in June as 40-year high inflation continued to show signs of easing.

The Labor Department’s producer price index (PPI) showed that demand for goods dropped 1.8 percent from June to July as demand for services increased only 0.1 percent.

Taking out the more volatile categories of food, energy and trade, final demand goods rose 0.2 percent in July to hit a 5.8 percent increase on the year, down from 6.4 percent from last month.

The PPI measures the prices that businesses pay to each other to produce their own goods and services. Thursday’s numbers follow Wednesday’s release of the consumer price index (CPI), which showed that annual retail inflation dropped in July to 8.5 percent from 9.1 percent in June.

While the CPI is a more direct measure of the inflation that consumers actually feel at the pump and in the grocery store, the PPI more closely tracks inflation on the supply side.

According to some metrics, two-thirds of the current inflation in the economy is due to supply-related issues, so Thursday’s numbers could be an indication that inflation is now on a downward path.

The dip could also be temporary. Both the CPI and the PPI have experienced month-to-month reprieves even as both metrics soared to relative highs in the economic fallout from the coronavirus pandemic.

The PPI jumped from around 2 percent before the pandemic to more than 11 percent in March of this year, leveling off twice in 2020. The CPI dipped three times over the same period while climbing from a pre-pandemic level of 2.5 percent to more than 9 percent in June.

Those fleeting decreases caused many economists, including Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen, to label inflation as “transitory,” while it proved to be a much more stubborn phenomenon. Yellen said earlier this year that she’d been wrong about inflation and that she didn’t fully understand what was causing it.

Still, economists are finding reasons to be hopeful about the current decline and seeing that it could be the beginning of a trend. They’re looking specifically to the current business cycle, which after a flash recession in 2020 and a booming recovery in 2021 may be normalizing to a more balanced mid-cycle phase.

“We’re in what I call a classic mid-cycle slowdown,” Boston College economist Brian Bethune said in an interview with The Hill. “Every business cycle has a recovery phase, meaning that employment and output recover, they re-achieve their previous levels, and we just saw that in July. Employment got back up to where it was prior to the recession that started March 2020. So we’re back up to where we were.”

“Once we hit that point,” Bethune said, “the progress slows down. In other words, we converge and ask now what’s the potential of the economy to grow, instead of seeing the faster growth of the recovery phase. Recovery-phase growth is faster than potential, and then in the mid-cycle growth is below potential.”

However, if that mid-cycle growth is too weak, a welcome period of deflation could be accompanied by a recession, spurred on by interest rate hikes from the Federal Reserve.

Indeed, the Commerce Department reported in July that the U.S. economy had shrunk in two consecutive quarters, meeting a colloquial definition of a recession. While that July number isn’t official and is almost certain to be revised, it could also mean that the Fed’s interest rate hikes may have been too aggressive.

“Every business cycle is unique,” Bethune said. “We observe these cycles, and we see expansion, peak, recovery. So we see the general pattern repeating, but the characteristics of every cycle are different.”

Updated at 10:07 a.m.