PPI inflation report takeaways

The producer price index, a gauge of costs at the wholesale level in the U.S. economy, posted an unexpected 0.1% decline in August. Here’s what to know:

For the third time this year, the PPI showed outright deflation in what is generally considered a measure of pipeline price pressures. Wall Street economists had been looking for a 0.3% increase. The core PPI, which strips out food and energy, also fell 0.1% though core minus trade services actually rose 0.3%The tame reading will only feed market expectations of a Federal Reserve rate cut next week, and President Donald Trump was quickly on the case. “Just out: No Inflation!!! ‘Too Late’ must lower the RATE, BIG, right now. Powell is a total disaster, who doesn’t have a clue!!!” he posted on Truth Social in his latest shot at Fed Chair Jerome Powell.Despite the tame inflation and near certainty of a rate cut, market reaction was muted. Stocks rose slightly and Treasury yields moved only modestly lower. The PPI is generally not considered a high-profile or well-understood metric, and traders are likely waiting for the consumer price index print Thursday.Fed officials look not only at headline numbers but also the underlying drivers. The PPI report provided good news on inflation fundamentals. The services sector, which drives some 80% of GDP, saw outright deflation, falling 0.2%. Even goods prices, which are much more heavily impacted by tariffs, rose just 0.1%.The CPI reading, due Thursday at 8:30 a.m. ET, will get more attention. As with the PPI, the consensus outlook is for a 0.3% increase. About four-fifths of the CPI and PPI numbers feed into the Fed’s preferred inflation gauge, the personal consumption expenditures price index. The CPI is the final big data point before the Fed’s rate decision a week from now.

“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. After last week’s jobs report, though, the market was already expecting the Fed to begin an easing cycle, so it remains to be seen how much of a near-term impact this will have on sentiment” — Chris Larkin, managing director, trading and investing, E-Trade from Morgan Stanley.

“The worst-case scenario on inflation isn’t playing out. The doves will be happy to see the year-over-year number back below 3 percent. Combined with the weak jobs data recently, this keeps us on track for rate cuts. However the speed and intensity might depend more on the big consumer index tomorrow morning.” — David Russell, global head of market strategy at TradeStation.

“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.” — Citigroup economist Andrew Hollenhorst.