In August, surprises came from an area most people don’t watch every day. The U.S. Bureau of Labor Statistics told us that U.S. businesses paid less for goods and services, with the Producer Price Index for final demand dropping by 0.1% when the number was seasonally adjusted. It was a big swing, as July had been a not-so-small rise in prices at 0.7%.
Headline inflation eases unexpectedly
The final total surprised. Experts had been ready for a jump of 0.3%, but the results did the opposite. Wholesale services prices, which count a lot in the indexes, dropped by 0.2%, and that was most of the entire push. The bottom line on the annual number surprised in a good way for the central banks: 2.6% for the PPI. The Experts had set the confidence bars at 3.3%.
The officials said that the administration had applied tariffs, and the administration in charge had told the people that prices would leap. August, however, shows them a contrary index. The turbo index falls too, by 0.1% on the month when compared to the prior month. Measured over a year, the core index posted a 2.8% increase, well below the anticipated 3.5% rise.
Fed’s preferred gauge still rising
Recent numbers suggest that inflation faced by producers is moving faster than people used to expect.
Stephen Brown, an economist with Capital Economics, observes:
“The overall story still is that tariff effects are dribbling in very gradually.”
A similar thought came from Bill Adams, chief economist over at Comerica Bank, who stated that wholesalers and retailers simply aren’t passing along tariff costs like many had thought they would. Reasons could include foreign suppliers temporarily reducing prices to keep customers, domestic demand that isn’t very strong, or lingering questions about whether and how tariffs might change.
Some items still increased substantially. Coffee, notably, jumped 6.9% just in July and is now 33.3% higher than a year ago. Yet most products are still following a slower path of change.
The Federal Reserve is still seeing its reading move. The category that excludes food, energy, and trade services climbed another 0.3% in August, now a modest four-month winning streak. The number is important to central bankers because it links to their favorite inflation measure, the personal consumption expenditures (PCE) index.
Markets treated the numbers calmly.
The EUR/USD pair isn’t moving much today, gold has slightly gone down in value, and Dow futures are stuck sideways before the NYSE bell.
Today’s lower-than-expected PPI is more proof that inflation isn’t raging. This kicks up the oddsthat the Fed will hit the cut button at the next meeting. Donald Trump keeps the pressure on Chair Powell, tweeting right after the report:
“Just out: No inflation!!! ‘Too Late’ must lower the RATE, BIG, right now.”
Broader signals back up the feeling that the economy is losing steam. The Labor Department has quietly slashed the previous job-gain count by 911,000 over the year to March, which is easy to miss to the casual observer but big on the risk desks. Taken with the cooling PPI, the drop is another reason to expect the Fed to respond sooner rather than later.
To sum up, today’s August PPI leaves the picture of a U.S. economy where inflation, even with external pressures like tariffs, is losing steam more than originally expected.
Since headline and core producer prices arrived weaker than analysts expected, the numbers bolster the argument for the Fed to take a softer stance on rates in the months ahead. The lower inflation in the pipeline suggests less pressure to keep borrowing costs high, hinting that a shift to more supportive monetary policy could be on the table sooner than originally thought.