Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Wholesale Prices Just Dropped Unexpectedly
Transcript
- Lucas: So the wholesale price data dropped this morning, and it actually surprised to the downside — producer prices fell 0.3 percent in June, driven almost entirely by a big drop in gasoline costs. Luna: Yeah, I saw that headline. Given everything else we've been tracking, that feels like a genuinely good data point for the disinflation narrative. Lucas: It does, and it's interesting because it cuts against what we've been hearing about sticky services inflation. The core PPI, excluding food and energy, was flat, but the headline decline is notable because wholesale energy costs tend to feed through to consumer prices with a lag. Luna: Right, so this could be a leading indicator that the consumer CPI prints in the next month or two might be softer than expected, especially on the energy component. Lucas: Exactly. And remember, yesterday's CPI came in at 3.5 percent annualized — that was a bit below expectations, too, thanks to easing energy. So we're seeing a consistent pattern: energy is dragging headline inflation down, but core measures are still sticky. Luna: Core CPI was essentially flat month-over-month, I think it came in at 336.1, basically unchanged from May. So the Fed's preferred gauge, core PCE, is probably still hovering around 2.7, 2.8 percent — still above target. Lucas: That's the puzzle. The wholesale number gives you hope that the pipeline is clearing, but when you look at services inflation — rents, medical care, insurance — those are still running hot. The producer price data doesn't capture those as directly. Luna: So is the market reading this as dovish? Because I saw bonds rallied a bit after the PPI release, but the 10-year yield is still at 4.55 percent, which is kind of where it's been stuck for weeks. Lucas: The bond market is in a wait and see mode. The PPI decline is good, but it's one data point. And the bigger story for the Fed is that the labor market is still pretty tight — initial jobless claims fell to 215,000 last week, continuing claims are low. The Fed's not going to cut rates just because wholesale gasoline prices dropped one month. Luna: No, and Chair Powell has been pretty clear that they need to see a sustained pattern of disinflation, especially in core services. But I wonder if this PPI print starts to change the conversation on the FOMC about the neutral rate. Lucas: That's a great point. If wholesale prices are falling, that suggests that corporate input costs are easing, which could mean margins are under less pressure. And if the economy is still growing — real GDP growth annualized at 2.1 percent last quarter — then the Fed might feel less urgency to cut. Luna: So basically, good news for the economy, but not necessarily good news for rate cuts anytime soon. Lucas: Right. It's the Goldilocks scenario that the Fed actually wants: inflation gradually coming down, but not so fast that the economy tips into recession. And the wholesale price decline is consistent with that Goldilocks narrative. Luna: But there's a risk, right? If energy prices stay low because of a global slowdown — like China's GDP just posted its slowest quarterly growth since 2022 — then falling wholesale prices might be signaling weaker demand, not just supply improvements. Lucas: That's the bear case. And it's not just China. You've got renewed tensions in the Hormuz strait, which could actually spike energy prices back up. So this PPI decline might be temporary if geopolitical risk heats up. Luna: Yeah, that headline about Hormuz hostilities driving an ECB rates rethink was pretty stark. If oil spikes, all bets are off for this disinflation trend. Lucas: Exactly. So we have to view this PPI number in context: it's a welcome sign, but it's fragile. The core story remains that inflation is stickier than the headline numbers suggest, and the Fed is likely to hold pat at the July meeting. Luna: Speaking of holding pat, the fed funds rate is still at 3.63 percent effective, and the interest on reserve balances is at 3.65. No movement there, and I don't expect any until September at the earliest. Lucas: Right. And the market is pricing in maybe one cut by December, but that's far from certain. The real action is in the composition of inflation — goods deflation versus services inflation. Luna: And that brings us back to the wholesale data. If PPI keeps falling, it puts downward pressure on goods prices, which could help core CPI drift lower even if services stay elevated. Lucas: Exactly. And that's the channel to watch over the next few months. If you're trying to understand where inflation is headed, don't just look at CPI — look at PPI, look at import prices, look at the ISM manufacturing prices paid index. All of those are giving a consistent signal that goods deflation is still in play. Luna: It's a nice reminder that the economy is complex. One number drops, and everyone wants to call victory, but the real story is always more layered. Lucas: Absolutely. And speaking of that complexity — if you're finding these macro conversations useful, whether it's understanding PPI or the yield curve or the labor market, it's worth noting that the show stays ad-free thanks to listeners who support us directly. Luna: Yeah, it's a small way to keep the economics conversation going without any sponsored interruptions. If you've gotten value from these episodes, you can help at buy me a coffee dot com slash fexingo. Lucas: Even a few bucks helps us keep digging into these data points and bringing you the context that matters. So, back to the wholesale price story — one thing I want to highlight is the pass-through lag. Luna: Sure, how long does it usually take for a drop in wholesale gasoline to show up at the pump? Lucas: Typically two to four weeks. So the June PPI decline should start showing up in July and August CPI readings. That's why this data point is more important than just one month's number — it's a predictor. Luna: So we might see headline CPI dip below 3 percent in the next couple of months if energy stays low. Lucas: It's possible. But again, the caveat is that core inflation might not follow as quickly. And the Fed focuses on core PCE, which is even stickier. So don't expect a victory lap from Powell anytime soon. Luna: Fair enough. So the takeaway for today: wholesale prices are falling, which is good for the disinflation story, but it's fragile and the Fed will need to see more before changing course. Lucas: Exactly. Keep an eye on those gasoline prices and the next PPI print. If we see another decline, the conversation around rate cuts will get a lot louder.