First Light News: Soft US PPI Inflation Sets the Stage for CPI Data

US PPI Inflation Delivers Welcome Relief

Headline PPI inflation rose by 2.6% YY, easing from 3.1% in July (and considerably lower than the 3.3% median forecast); MM headline inflation fell by 0.1%, down from a 0.7% increase in July. A similar picture was seen across the core PPI inflation measures, with MM data falling by 0.1% and the YY print easing to 2.8% (down from 3.4%).

The PPI release triggered immediate downside in US Treasury yields and the USD (though short-lived), while major US equity indexes continued to reach record highs as investors repositioned for a potentially more aggressive Fed easing cycle. Spot gold (XAU/USD) also saw a brief rise.

So, despite the surprise pop higher in the July PPI print, inflation is now clearly drifting in the right direction. This reinforces the narrative of cooling price pressures, with several market commentators now even discussing a potential 50-bp rate cut from the Fed next week.

However, while the combination of softer PPI inflation and a substantial downward revision to job growth has all but sealed the deal for at least a 25-bp rate reduction at next week’s meeting, longer-term inflation risks remain elevated. Tariff policies continue to work their way through the system, potentially creating inflationary pressures just as the Fed appears increasingly dovish. This timing mismatch could set the stage for a stagflationary environment in the coming quarters. Nevertheless, today’s CPI data will be crucial in confirming whether the disinflationary trend is broadening beyond producer prices.

US CPI Inflation Expected to Increase at the Headline Level

If we see a lower print in the CPI today, this would certainly increase the odds of a 50-bp reduction next week and open the door to shorting opportunities in the USD and long positions in equities. Personally, I do not envision the Fed cutting by 50 bps unless we see something dramatic today. Ahead of the CPI figures, markets are pricing in 27 bps of Fed easing for this month’s meeting, a total of 68 bps worth of cuts for the year-end, and 146 bps by the end of 2026.

Expectations for the YY CPI data suggest that price pressures rose by 2.9% (from 2.7% in July), with MM expected to rise by 0.3% (from 0.2%). The core YY and MM measures are anticipated to remain steady at 3.1% and 0.3%, respectively. I have attached the LSEG calendar for the release, which also shows the maximum and minimum estimates.

ECB Expected to Remain on Hold

Shortly before the US CPI inflation report, the ECB’s rate decision lands, and investors are fully pricing in the expectation that the central bank will leave all three benchmark interest rates unchanged. I think it is fair to say that most economists now believe the ECB has completed its easing cycle.

To quote ECB President Christine Lagarde, ‘the economy is in a good place’. You will note that eurozone unemployment is at historic lows, inflation is at target, and although GDP growth is not particularly strong, it remains stable. I think the ECB will sit tight for the time being and wait for more clarity regarding Trump’s tariffs. No doubt France’s political situation will be a talking point at today’s press conference, but do not hold your breath for anything earth-shattering here.

Ultimately, I believe the most significant driver today will be the US CPI. Unless there is something unexpected at the ECB meeting, it will likely be largely overlooked by the markets.

That’s it from me this morning. Happy trading!

Written by FP Markets Chief Market Analyst Aaron Hill