Producer prices were lower than expected in June, with the headline index edging up 0.1 percent both on the month and year-over-year, compared with Econoday's consensus forecasts of 0.2 percent and 0.5 percent, respectively. The 12-month rate was the lowest since August 2020. Excluding food and energy, the PPI-final demand rose at a steady pace of 0.1 percent on the month, for a 12-month gain of 2.4 percent. The core index, which also excludes trade services, increased 0.1 percent on the month after being flat in May, but slowed down to 2.6 percent from 2.8 percent on the year, the lowest rate since February 2021.

Energy prices rose 0.7 percent on the month but fell 23.9 percent from June 2022. Food prices edged down 0.1 percent from May and were up 0.2 percent year-over-year. Trade services increased 0.2 percent on the month and 1.5 percent year-over-year, both slowing down compared with May.

Services led the gains in June, with a steady monthly increase of 0.2 percent, while the 12-month appreciation slowed to 2.3 percent in June from 2.4 percent in May. Goods prices were flat on the month after falling 1.6 percent, and fell further year-over-year, at a pace of 4.4 percent after dropping 2.4 percent in May.

Just like May's data, the June PPI report provided further evidence of an easing inflation momentum after the CPI came in lower than expected at 3.0 percent year-over-year, its lowest level since march 2021. Both sets of data provide some breathing room for the Federal Reserve, although price gains remain stronger than the desired 2 percent target.

Econoday's Consensus Divergence Index is currently at plus 2 and consistent with an economy performing in line with expectations. Yet the lower-than-expected inflation results have been holding back the index, and when excluding these indicators, such as this report and the CPI, the index rises to plus 15 to indicate that the real economy is exceeding expectations to a degree.

Producer prices in June are expected to rise 0.2 percent on the month versus a 0.3 percent fall in May. The annual rate in June is seen at plus 0.5 percent versus May's plus 1.1 percent. June's ex-food ex-energy rate is seen at 0.2 percent on the month and 2.8 percent on the year which would exactly match May's results.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.

The PPI measures prices at the producer level before they are passed along to final consumers. A portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an"inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers increase, businesses are faced with either charging higher prices or taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI’s lower volatility. Also, the PPI does not include owners’ equivalent rent—a large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the"core PPI" which excludes these two components.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.