The dollar again found itself under background pressure. If on Wednesday dollar bulls were disappointed by the consumer price index, then on Thursday production inflation was in the spotlight. July PPI confirmed that inflationary pressure in the U.S. economy is gradually weakening. After several months of elevated inflationary pressure, producer inflation has noticeably lost momentum, and this process is unfolding alongside cooling consumer inflation and a slowdown in the U.S. labor market.

On a monthly basis, the headline PPI was flat, whereas most analysts had expected a small 0.2% increase. On an annual basis, the indicator slowed significantly — from 5.5% to 4.7%. The downward trend here is recorded for the second month in a row.

This indicates that producer inflation has not only stopped accelerating — its growth rate has materially declined. In particular, the annual figure fell by up to 0.8 percentage points. In my view, the year-on-year dynamic is telling. A zero monthly "increase" in PPI could be attributed to volatile components. Still, the slowdown in the annual rate of producer inflation suggests a broader process of normalization in price pressures.

Now a few words about the structure of the release. Prices for final demand goods fell by 0.7% after a 1.4% decline in June. The main driver of the downward move was a drop in energy costs: the corresponding sub index plunged 3.1% (in particular, gasoline fell 5.7%). Food prices also declined — by 0.9%.

It should be acknowledged that the energy component is traditionally highly volatile and thus can quickly change the overall PPI picture. Therefore, when assessing the sustainability of the inflationary process, one should primarily look at measures cleaned of the most unstable factors.

For example, the final demand index excluding food, energy and trade services rose 0.4% in July, after a very modest 0.1% increase the previous month. In annual terms, this measure held June's pace at 4.7%.

In other words, it is still too early to talk about the complete disappearance of inflationary pressure at the producer level. But here the context matters. First, headline PPI has in fact slowed materially. Second, goods prices are already showing deflationary dynamics. Third, this slowdown is happening for the second month in a row after strong increases in prior months — meaning this is not a one-off weakness but a reversal of the previously formed inflationary impulse.

Not long ago, the market feared that rising business costs would gradually be passed on to the end consumer. That producer inflation would serve as a leading indicator — a harbinger — of renewed CPI acceleration. However, July PPI did not confirm those fears. On the contrary, the report suggests that the inflationary impulse in the U.S. economy is steadily weakening.

In this context, July PPI should be compared with Wednesday's CPI release. Briefly, consumer inflation in July also showed signs of further cooling. Headline CPI rose only 0.1% month-on-month after a 0.4% decline in June. On an annual basis, the measure fell to 3.4% from 3.5%. Core CPI increased by just 0.2% in July, while its annual pace slowed to 2.5% (from June's 2.6%).

Hawkish officials may argue that the overall inflation picture is still far from ideal and that readings remain above the Fed's target range. But if both reports are assessed dynamically, they form a fairly coherent picture: PPI shows producer-side pressure easing, while CPI shows that this cooling is gradually appearing at the consumer level.

In other words, we are seeing not a one-off decline in a single inflation indicator, but a gradual, consistent decline in inflation across the entire price-formation chain. The general inflationary backdrop in the U.S. is becoming less strained.

By the way, there is another important element of this picture — the U.S. labor market. Last Friday it became known that the U.S. economy lost 23,000 jobs in July, instead of the roughly 85,000 gain expected. At the same time, prior months' figures were substantially revised down (in total by 103,000). Particularly notable in the inflationary context are wage dynamics. Average hourly earnings rose only 0.1% month-on-month last month, while the annual pace slowed to 3.2% year-on-year (the slowest growth since May 2021). This indicates that wages are also no longer a source of additional inflationary pressure.

Of course, it is too early to proclaim a full victory over inflation in the U.S. Energy remains a potential source of risk, especially given ongoing tensions in the Middle East. In addition, services remain more resilient than goods prices.

However, the Fed evaluates not so much the static level of inflation measures as the dynamics of their change. And here the vector is gradually shifting in a direction favorable for a "dovish maneuver."

The Fed is unlikely to react to one or two weak reports with a sharp change in rhetoric. The central bank needs to be convinced that the trend is sustainable, especially amid escalation in the Middle East. Still, July data have contributed to forming a fundamental picture that is negative for the greenback: inflation is not accelerating, and the labor market is gradually losing excess resilience.

The muted reaction of EUR/USD to the latest release is explained by the fact that the main inflation "surprise" was priced in by the market on Wednesday when July CPI was published. The PPI only confirmed the slowdown trend in inflation. Moreover, core PPI and services prices remain fairly resilient, so traders have not (so far) revised expectations about the prospects for Fed easing. All this suggests that EUR/USD is likely to remain consolidated in the price corridor 1.1520–1.1570 in the near term, the bounds of which correspond to the lower and upper lines of the Bollinger Bands on the four-hour chart.