In a recent development, the producer price index (PPI), a key indicator of wholesale costs in the U.S. economy, unexpectedly fell by 0.1% in August. This marks the third instance of deflation recorded this year, diverging from Wall Street economists’ expectations of a 0.3% increase. The core PPI, which excludes volatile food and energy prices, also decreased by 0.1%, although when trade services are excluded, it actually increased by 0.3%.
This subdued inflation reading is likely to reinforce market anticipations of a Federal Reserve rate cut next week. President Donald Trump was quick to respond to the data, expressing his frustrations with Fed Chair Jerome Powell on Truth Social. He stated, “Just out: No Inflation!!! ‘Too Late’ must lower the RATE, BIG, right now. Powell is a total disaster, who doesn’t have a clue!!!”
Despite the benign inflation figures and the strong likelihood of a rate cut, market reactions were relatively calm. Stock prices edged up slightly, while Treasury yields showed only minimal declines. The PPI typically attracts less attention compared to other economic indicators, and traders appear to be holding back, awaiting the more closely watched consumer price index (CPI) release scheduled for Thursday morning.
Federal Reserve officials consider a range of factors beyond just headline inflation numbers, and the PPI report suggested positive underlying trends. Notably, the service sector—which constitutes around 80% of the nation’s GDP—experienced outright deflation, falling by 0.2%. Meanwhile, prices for goods, which are significantly affected by tariffs, rose merely by 0.1%.
Looking ahead, the CPI data, due to be released at 8:30 a.m. ET, is expected to be more influential. Analysts predict a 0.3% increase, which holds significant weight as it feeds into the Fed’s preferred inflation metric, the personal consumption expenditures (PCE) price index. The CPI is the final major economic report that will shape the Fed’s decision regarding interest rates in the upcoming meeting.
Market experts shared their insights on the current economic landscape. Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, noted that while tomorrow’s CPI will carry greater significance, the PPI data has paved the way for anticipated Fed rate cuts. He acknowledged that following last week’s jobs report, market expectations for an easing cycle were already in place, leaving uncertain how significantly this would impact market sentiment in the short term.
David Russell, global head of market strategy at TradeStation, reflected on the improved inflation outlook, observing that the year-over-year rate has dipped below 3 percent. He commented that this, combined with recent weak job data, keeps the trajectory toward potential rate cuts intact, though the degree of those cuts may hinge on upcoming consumer index results.
Citigroup economist Andrew Hollenhorst commented on the overall muted inflationary pressures in the PPI report, asserting that there is nothing within the data that would deter Fed officials from proceeding with a 25 basis point cut in September and potentially following up with similar cuts in subsequent policy meetings.
As the financial community awaits further data, all eyes remain on the impending CPI release, which could further influence monetary policy decisions moving forward.
