Surprise Drop in PPI Strengthens Case for September Fed Rate Cut

PPI Miss Sparks Rate Cut Optimism Across Markets

Wholesale prices unexpectedly fell 0.1% in August, adding weight to growing expectations that the Federal Reserve will approve a rate cut in its upcoming policy meeting. The latest Producer Price Index (PPI) report from the Bureau of Labor Statistics came in well below the 0.3% increase forecasted by economists, offering the central bank a stronger justification for easing its policy stance. Core PPI, excluding food and energy, also dropped 0.1%, versus an expected 0.3% rise.

Markets quickly responded. Futures on the S&P 500 advanced following the softer inflation data, while Treasury yields dipped modestly. The benchmark 10-year Treasury yield declined to 4.068%, and the 2-year yield dropped 1 basis point to 3.529%, reflecting expectations of a dovish shift by the Fed. According to CME FedWatch, traders are now fully pricing in a rate cut in September.

Service Sector Weakness Bolsters Dovish Case

A key driver of the weaker PPI was a 0.2% decline in services prices, with trade services down 1.7%. Notably, margins for machinery and vehicle wholesaling fell 3.9%. These sectors are closely monitored by the Fed for insights into broader pricing pressures and monetary policy impacts.

Goods prices inched up just 0.1%, held down by a 0.4% decline in energy costs. Food prices were marginally higher, rising 0.1%, while core goods excluding food and energy saw a 0.3% increase. Even with these modest gains, overall price pressures appeared subdued.

Tariffs and Labor Concerns Enter Fed Calculus

Though inflation remains above the Fed’s 2% target, officials have pointed to easing rent and wage pressures as reasons for patience. However, Trump-era tariffs continue to impact specific categories, including a 2.3% surge in tobacco prices. The broader concern remains whether these tariffs, combined with slowing job growth, could weigh more heavily on economic activity.

Recent data revisions showing nearly 1 million fewer jobs created in the year ending March 2025 have heightened concerns over labor market health, even as Fed commentary continues to frame employment as “solid.” This reassessment could be another factor pushing policymakers toward easing.

Fed Rate Cut Outlook: Bullish Case Builds, But Eyes on CPI

The PPI data adds to the bullish narrative for a Fed rate cut next week. However, traders are watching Thursday’s Consumer Price Index (CPI) print closely for confirmation. If CPI also shows easing inflation, expectations for not just a rate cut—but potentially more than one—could solidify. For now, bond markets and equity futures suggest growing confidence that the Fed will deliver, keeping the short-term outlook for equities bullish and Treasury yields under pressure.