Producer Prices Come in Lighter Than Expected, Fueling Anticipation of a September Fed Rate Cut

Production workers assemble car seats at the Bridgewater Interiors manufacturing plant in Warren, Mich., on March 8, 2004. (Bill Pugliano/Getty Images)

Producer prices—a metric of the prices paid by businesses for goods and services—rose less than market forecasts, suggesting that inflationary pressures might be dissipating heading into a key Federal Reserve policy meeting next month.

According to the Bureau of Labor Statistics (BLS), the Producer Price Index (PPI) rose 0.1 percent in July, down from 0.2 percent in June. This came in below the consensus estimate of 0.2 percent.

On a year-over-year basis, the PPI slowed to a smaller-than-expected 2.2 percent, down from 2.7 percent in the previous month.

Prices for final demand goods surged 0.6 percent, the largest monthly increase since the 1.1 percent spike in February, the BLS said. Most of the gain can be attributed to higher energy prices, which climbed 1.9 percent.

Prices for final demand services tumbled 0.2 percent for final demand services, the biggest drop since March 2023. The decline was fueled by a decrease in the index for final demand trade services.

Core producer prices, which omit the volatile energy and food categories, were flat. This is down from 0.3 percent registered in June and below economists’ expectations of 0.2 percent.

The core PPI eased to 2.4 percent compared to the same time a year ago, down from 3 percent.

Since January 2021, the PPI has risen cumulatively 25 percent.

Heading into the July PPI report, there had been indicators suggesting a reacceleration of price pressures.

Earlier this month, the Institute for Supply Management’s (ISM) July Manufacturing Purchasing Managers’ Index (PMI)—a metric signaling economic trends in the manufacturing sector—revealed that input price pressures unexpectedly jumped for the first time since April. In addition, they have remained in expansion territory for seven consecutive months.

The S&P Global Manufacturing PMI also reported a significant boost in input costs amid higher prices for energy, freight, labor, and raw materials.

ISM’s July Services PMI report highlighted a rapid increase in prices.

The PPI is an important metric for economists because the gauge functions as a precursor to future inflation trends since it is early in the supply chain.

“Even as CPI inflation is back on the decline, other datapoints are showing warning signs,” The Kobeissi Letter, a commentary newsletter that reports on the global capital markets, stated on social media platform X.

Next on the economic calendar is the July CPI report.

According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimate, the annual inflation rate is expected to be unchanged at 3 percent. The core inflation rate is also anticipated to hold steady at 3.3 percent.

Market Reaction

U.S. stocks kept their gains intact, with the leading benchmark indexes up as much as 0.9 percent.

Treasury yields were mostly red across the board. The benchmark 10-year yield fell below 3.88 percent. The two- and 30-year yields declined to 3.97 percent and 4.19 percent, respectively.

The U.S. Dollar Index (DXY), a gauge of the buck against a basket of currencies, was little changed at above 103.00.

For investors, the PPI report was in the goldilocks zone: not surging to reignite inflation fears but not contracting to fuel deflation threats.

This could give the Federal Reserve more confidence to cut interest rates at the September policy meeting.

The futures market has fully priced in a rate cut next month, according to the CME FedWatch Tool. Traders are debating whether the central bank will reduce the federal funds rate by a quarter- or half-point.

Fed Chair Jerome Powell told reporters at a post-meeting press conference that there is now more focus on the labor side of the institution’s dual mandate of stable prices and maximum employment.

Despite a weaker-than-expected July jobs report, which drove some of the recent sharp selloff on Wall Street, employment fears diminished last week. Initial jobless claims dipped to 233,000 for the week ended Aug. 3, down from the previous week’s 250,000 claims, the Department of Labor data showed.

While the next two-day Fed meeting is not until late September, market watchers will receive minutes from the central bank’s July meeting to determine where monetary policymakers stand on interest rates, the labor market, inflation, and the overall economy.

The CPI data could be the ultimate driver of confidence for the central bank, says Mark Hamrick, the senior economic analyst at Bankrate.

“The CPI needs to behave if the Fed is going to cut rates,” he said in a statement. “After heightened stock market volatility and concern about signs of weakening in the job market, the hope is that the release of the July Consumer Price Index will bring some better news. Or, at the very least, we would welcome an absence of a surprising resurgence of inflation.”