The Producer Price Index (PPI) registered an unexpected decrease of -0.1% in August. This is outright deflation and the third time this year. Like the consumer price index, this metric tracks the wholesale costs that businesses—and ultimately consumers—face across the U.S. economy. It stunned Wall Street economists, who were looking for a 0.3% gain. Today’s unexpected figures point the way toward a change in monetary policy as the Federal Reserve’s Federal Open Market Committee heads toward its next meeting.
Even the core PPI—one of the Fed’s favorite inflation metrics, which excludes food and energy prices—dropped by 0.1%. With trade services factored in, this core measure rose by 0.3%. Prices in the service sector—which makes up nearly 80% of the GDP—saw a significant drop, falling by 0.2%. At the same time, prices for goods—heavily impacted by tariffs—were up only slightly at 0.1%.
David Russell, the global head of market strategy at TradeStation, noted the implications of these figures: “The worst-case scenario on inflation isn’t playing out. The doves should welcome the year-over-year number dropping back below 3 percent. Taken together with the soft job creation numbers of late, this further bolsters the case for rate cuts ahead. He continued that the broad market reaction would probably first look to the success of the upcoming Consumer Price Index (CPI) reading.
The PPI data serves as a precursor to the CPI reading that will be released on Thursday at 8:30 a.m. ET. Market analysts are looking for this consumer index to have greater influence over directing market sentiment. Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented on the significance of the PPI: “Tomorrow’s CPI will carry more weight, but today’s PPI print essentially rolled out the red carpet for a Fed rate cut next week.”
The year-over-year PPI is now below 3 percent. This is important, since it feeds into the Federal Reserve’s preferred inflation measure, the personal consumption expenditures price index. Roughly four-fifths of both CPI and PPI figures go into this calculation.
Citigroup economist Andrew Hollenhorst reflected on the overall inflationary trends: “Inflationary pressure in PPI appears to be muted overall. We see nothing in this report (or its implications for core PCE) that would dissuade Fed officials from cutting 25bp in September and proceeding to cut 25bp at each upcoming policy meeting.”
The PPI is not a headline-grabbing measure, its most recent reading could be a sign of an easing cycle to come from the Federal Reserve. This would be in line with market expectations driven by last week’s job reports emphasizing a rapidly cooling labor market.