The United States Producer Price Index fell 0.3% in June on a seasonally adjusted monthly basis, the Bureau of Labor Statistics reported Wednesday morning, significantly undercutting the consensus expectation of no change and compounding a wave of softer-than-expected inflation data that is rapidly reshaping near-term Federal Reserve policy expectations. The result follows Tuesday's June CPI report, which showed a monthly decline of 0.4% — the steepest single-month drop since April 2020 — and an annual inflation rate of 3.5%, well below the 3.8% forecast.
The June PPI decline was driven entirely by goods prices, which fell 1.4% on the month. The BLS attributed the drop to broad-based declines across energy categories including diesel fuel, gasoline, jet fuel, and grains, sectors where the brief easing in geopolitical tensions surrounding the Strait of Hormuz and a partial normalization of crude oil pricing fed through to the wholesale level. Final demand services moved up 0.2%, providing a partial offset, while the core measure — which excludes volatile food and energy — rose just 0.1%, well below expectations for a 0.4% gain.
On a year-over-year basis, the final demand PPI increased 5.5% in June, a notable deceleration from the 6.5% annual rate recorded in May, which had been the highest reading since November 2022. The trajectory of the year-over-year numbers reflects the dramatic impact that the Iran conflict-related energy price spike has had on wholesale prices over the past three months, and the equally sharp sensitivity of those numbers to any cooling in energy costs.
The market reaction was swift. According to CME FedWatch, the probability of a July rate hike fell from approximately 42% before the CPI data on Tuesday to 17% as of Wednesday morning, with the combined impact of the two soft readings making it increasingly difficult for Fed officials to justify an immediate tightening move absent a fresh inflationary shock. Fed Chair Kevin Warsh, testifying before the Senate Banking Committee for a second consecutive day on Wednesday, struck a cautious note, saying Tuesday that "one data point was not enough to declare victory over inflation" — a line markets are reading as an effort to preserve optionality rather than commit to a September hike.
Futures markets now expect the Fed to hold rates steady at 3.50% to 3.75% in July while retaining a meaningful probability of a hike in September or November if subsequent data reverses the recent cooling trend. The 10-year Treasury yield had risen to 4.483% on Tuesday ahead of the PPI data as bond markets positioned for potential additional supply and a higher-for-longer policy path; the softer PPI pushed yields modestly lower in Wednesday morning trading.
Equity markets took the dual-report data as broadly supportive, with S&P 500 futures adding to gains seen earlier in the session following ASML's earnings beat and PayPal's takeover news. Sector positioning shifted modestly toward rate-sensitive names including homebuilders and utilities, which had underperformed during the period of peak inflation anxiety, while financial sector stocks continued to benefit from both the broader risk-on tone and their own strong earnings reports. The back-to-back inflation surprises also helped lift corporate bond markets, where spreads tightened slightly as default risk models adjusted to a lower near-term rate path.