The Federal Reserve’s preferred measure of inflation, the Producer Price Index (PPI), took its biggest historic drop in July. This decline has led to increasing hopefulness about interest rates in the U.S. For context, the PPI actually dropped by 0.1% in August, a dramatic reversal from the inflationary trend. On a year-on-year basis, growth of the PPI decelerated to 2.6%. This is a dramatic decrease from last quarter’s 3.1% rate, which too was revised down from an already lowered estimate of 3.3%. While it’s certainly possible that inflation could be transitory, this data has understandably led many to reassess inflation expectations and its potential impact on monetary policy.
Core producer prices excluding food and energy followed a similar pattern, falling by 0.1% on the month as well. The annual growth rate for these core prices dropped to 2.8%, a notable drop from 3.4% only a month earlier. The PPI has a history of serving as a leading indicator for headline inflation. Together with positive news on the prospect for moderated inflationary pressure, hopes are rising for a more optimistic scenario in coming months.
The dovish surprise in the PPI means more for financial markets. Investors cheered the news, PPI equity bulls took relief in softer than headline PPI levels. Largely inspired by this PPI data, the Nasdaq100 busted higher, most remarkably above 24,000, blasting into all-time record highs!
Market watchers noted that the shortfall in producer prices was 0.4 percentage points off consensus expectations. Economists had forecast a jump in PPI growth to 3.3%, but no such luck. On the contrary, the real numbers confirm what is perhaps a widespread misconception. That means the Federal Reserve should be prepared to cut interest rates even more aggressively. Market confidence has skyrocketed, raising the odds of three or more rate cuts before the end of the year to 74%. This major move serves to underscore the growing expectations among investors.
As investors enjoyulating these wal la-la, they are all biting tumblers to fiery-eyed that cadence dolmonetary policy and inflation.… The latest PPI data plays right into the continuing narrative of economic stability and blossoming growth prospects. Financial experts from every corner have called on stakeholders to be vigilant. Most importantly, they must be prepared to consider what this data will do to the long-term economic landscape.