The U.S. Producer Price Index for July was a mixed bag, with much weaker than expected headline results, but stronger core prices. Ultimately, it shouldn’t stand in the way of further cuts to interest rates.

The PPI fell sharply in July, dropping by 0.9%. This is well below consensus and the largest month-on-month decline in eight years.

A 5.8% decline in energy costs was the main factor, thanks to a 17.7% drop in gas prices, and a 4% slide in the price of natural gas. Food costs also dipped by 0.6%, due to lower prices for fruits and vegetables.

Producer prices are now just 1.5% higher year-on-year, returning to a pace last seen in July 1999.

Excluding food and energy effects though, core prices were up a greater-than-expected 0.2%. “This is not a big concern, however,” says BMO Nesbitt Burns, “given that core prices earlier in the production stage are falling sharply. Core intermediate prices fell by 0.4%. Most of the increase in core costs was due to a 0.2% rise in capital equipment costs, as with a lull in incentive programs, light truck prices rose by 2.3%, although heavy trucks, aircraft and ships also cost more.”

BMO Nesbitt Burns says that inflation pressure remains well under control. “This report suggests that the downward pressure on profit margins will continue, as firms have little pricing power. Further, there is little to stand in the way of the Federal Reserve trimming rates on August 21, or on future dates.”