Wholesale inflation falls in August, boosting odds of Fed rate cut next week
Producer prices dipped 0.1% in August and core PPI also fell, prompting traders to bet the Federal Reserve will cut rates at its Sept. 17 meeting
Wholesale inflation unexpectedly fell in August, the Bureau of Labor Statistics said Wednesday, increasing expectations that the Federal Reserve will cut interest rates at its Sept. 17 meeting. The Producer Price Index, which measures prices received by producers for final demand goods and services, declined 0.1% month-over-month after a 0.7% increase in July.
Excluding the often-volatile categories of food and energy, core PPI also fell 0.1% in August. On a 12-month basis, the headline PPI rose 2.6% and core PPI was up 2.8%.
The softer-than-expected report immediately shifted market expectations. The CME FedWatch Tool showed traders pricing in a 100% probability of a rate cut at the Fed’s meeting next week, with a roughly 90% chance of a quarter-point reduction and about a 10% probability of a half-point move.
“Wednesday’s PPI is exactly the kind of report that the Federal Reserve was hoping for,” Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management, said. “Tame inflation data gives the Fed the all clear to cut rates later this month.”
Services prices fell 0.2% in August, helping to pull the headline figure lower. Within services, prices for trade services dropped 1.7%, and machinery and vehicle wholesaling plunged 3.9%. Goods prices edged up 0.1%. Final demand food costs rose 0.1%, while energy prices slid 0.4%.
Some imported items showed sharp moves that officials and analysts flagged as possible signs of tariff impacts. Tobacco products jumped 2.3% in August and coffee prices surged 6.9% for the month, leaving coffee up 33.3% over the past year. Still, wholesalers and retailers overall have been slow to pass tariff-driven cost increases through to consumers.
President Donald Trump reacted to the report on Truth Social, writing: “Just out: No Inflation!!! ‘Too Late’ must lower the RATE, BIG, right now. Powell is a total disaster, who doesn’t have a clue!!!” Trump has repeatedly pressed the Fed to cut rates and has argued that tariffs will not stoke inflation.
Analysts offered several explanations for the muted pass-through of tariff costs. Bill Adams, chief economist at Comerica Bank, said foreign suppliers may be discounting to maintain market share, weak U.S. demand could be restraining price increases, or businesses may be holding off on passing costs to consumers until tariff rates are settled.
“Other factors like lower energy prices and modest domestic demand are slowing the passthrough of tariff prices to the real economy,” Adams said.
Federal Reserve Chair Jerome Powell last month signaled a possible rate cut in September as signs of labor-market softness have weighed on policymakers’ outlook. The Labor Department recently revised down the number of jobs created during the 12 months ended in March by nearly 1 million — the largest downward revision since 2000 — and average monthly payroll growth for June, July and August totaled about 29,000, below the level needed to keep unemployment steady.
The August PPI readout narrows another key uncertainty for the Fed: whether inflation remains stubborn enough to delay easing. With producer prices cooling and labor-market data showing weakness, investors and many economists expect the central bank to move next week. How large that cut will be — and how it will affect credit markets and the broader economy — will depend on incoming data and the Fed’s assessment of durability in the recent easing of price pressures.