The U.S. Department of Labor released data on Thursday showing that wholesale prices in July eased compared to June, but overall inflation levels were higher than market expectations. The core conclusion is that Wednesday's data indicated a moderation in consumer-side inflation, and combined with this mixed wholesale price report, it generally supports the Federal Reserve maintaining a wait-and-see stance and pausing rate hikes.

The core Producer Price Index (PPI), which excludes food, energy, and trade services, rose 4.7% year-over-year in July, compared to a market expectation of 4.6%, but below June's 5.1% annual increase. On a month-over-month basis, PPI increased by 0.4%, exceeding the expected 0.3% and following June's 0.1% monthly gain. When including volatile energy prices, the overall wholesale price index rose 0.2% month-over-month, matching June's pace. Core PPI, excluding food and energy (including trade services), rose 0.2% month-over-month, a slowdown from June's upwardly revised 0.4% increase. The core producer price index rose 4.2% year-over-year, down from 4.7% in June.

Stephen Brown, Chief North America Economist at Capital Economics, wrote in an analysis report: "The PPI data, combined with yesterday's CPI release... suggests that our previously forecasted September rate hike now seems unlikely." While consumer prices are cooling, rising costs for corporate production and services mean that companies may find it difficult to pass these costs on to consumers, squeezing profit margins.

Richmond Fed President Tom Barkin said on Thursday morning that while there are signs inflation might recede on its own, supply chain bottlenecks, strong demand for AI components, and persistently high inflation over the long term also indicate that inflation could be deeply embedded in the economic system. Barkin noted that if the latter scenario proves true, policy intervention will be needed to drive inflation sustainably down to the Fed's 2% target. "The impetus for easing inflation can come from the demand side," Barkin said. "Many consumer-facing businesses report very limited room to pass on costs, and consumers are highly price-sensitive. If the fundamentals supporting household demand, such as the stock market and job market, weaken, consumer resistance to price increases will intensify further." He added, "If not, the Fed will need to step in."

Analysts will use this PPI data along with the cooling July Consumer Price Index (CPI) to estimate the Fed's preferred inflation gauge—the Personal Consumption Expenditures Price Index (PCE). This indicator is scheduled for release on August 26. Before the report's release, the market expects the core PCE, excluding food and energy, to show a 0.2% month-over-month increase, similar to the CPI performance.