Prices charged by U.S. businesses were up 9.8 percent in July compared with a year ago, the smallest 12-month gain this year.

The Department of Labor said Tuesday that its Producer Price Index for final demand fell 0.5 percent in July compared with a month earlier, largely because gasoline and oil prices fell. This was the first month-to-month decline in more than two years.

Economists had expected an annual rise of 10.3 percent and a monthly increase of 0.3 percent.  Last month, the Producer Price Index was up 11.3 percent compared with June of 2021 and 1.1 percent compared with the prior month.

The Producer Price Index hit a record high year-to-year of 11.6 percent in March.

Excluding foods, energy, and trade services, producer prices moved up 0.2 percent in July, a deceleration from the 0.3-percent rise in June. For the 12 months ended in July, the index for final demand less foods, energy, and trade services increased 5.8 percent, a slowdown from the 6.4 percent annual gain in the prior month.

The index for final demand goods—ready-to-use products sold to consumers, businesses, and governments—fell 1.8 percent in July, the largest decline since moving down 2.7 percent in April 2020. That decline can be traced to a 9.0-percent drop in prices for final demand energy. Excluding energy, prices of final demand goods rose 1.0 percent. Excluding food and energy, prices were up 0.2 percent.

The government said eighty percent of the July decline in the index for final demand goods is attributable to gasoline prices, which fell 16.7 percent.

Services prices also rose in the month, driven up by expanding margins for wholesalers and retailers—referred to as “trade services” in the government data—and higher prices for warehousing and transportation services. Trade services margins expanded 0.3 percent. Warehousing and transportation prices rose 0.4 percent. Excluding trade, transportation, and warehousing, service prices fell 0.1 percent.

The Producer Price Index (PPI) is sometimes inaccurately described as an inflation index for wholesale prices. Although it was once called the wholesale price index, it has never been focused on wholesale prices. Instead, it is constructed by looking at what businesses that produce goods and services in the U.S. were paid for goods and services, while the better-known Consumer Price Index measures what consumers paid and includes both imports and a stand-in for home ownership called owners-equivalent of rent that isn’t counted in PPI.

“The Wholesale Price Index (WPI) was the name of the program from its inception in 1902 until 1978, when it was renamed the Producer Price Index,” the Bureau of Labor Statistics explains on its website. It explains that: “the term Wholesale Price Index was misleading in that the index never measured price change in the wholesale market.”

The PPI measures prices both for various stages of intermediate demand, businesses selling to other businesses, and final demand, which measures domestic producers selling goods and services to domestic end-users, typically government agencies, consumers, or businesses. The widely reported headline number for PPI is the final demand figure.

The PPI excludes import prices, which are paid to foreign producers, and doesn’t count sales taxes, since those are paid to state and local governments. It also includes export prices, which are excluded from CPI because they are paid by non-U.S. consumers.

The target set of goods and services included in the PPI is the entire marketed output of U.S. producers. This includes goods, services, and construction products purchased by other producers as inputs to their operations or as capital investment, goods and services purchased by consumers either directly from the service producer or indirectly from a retailer, and products sold as export and to government.

The CPI looks at the set of goods and services purchased for consumption purposes by urban U.S. households, excluding business purchases for capital investment or as inputs to products, government purchases, and exports. The CPI also excludes prices not paid directly by consumers, such as medical bills paid for by government programs or insurers, that are included in PPI.