Core wholesale prices, excluding the more volatile food and energy sectors, surged more than anticipated, casting further doubt on the likelihood of a significant interest rate reduction next week. According to the Producer Price Index (PPI), which tracks the cost of goods and services for domestic producers, overall wholesale prices increased by 0.2% last month, aligning with economists' predictions based on a Wall Street Journal survey. However, the core wholesale prices — excluding food and energy — climbed by 0.3% in August compared to the previous month, surpassing the expected 0.2% rise.
On Thursday morning, U.S. stock indices showed minimal movement. The Dow Jones Industrial Average fell slightly by less than 1%, while the S&P 500 and Nasdaq 100 each experienced modest gains of under 1%. Jobless claims matched forecasts, with 230,000 new claims, indicating a continuing cooling in the employment market.
Core Consumer Price Index (CPI) data, released on Wednesday, revealed a 3.2% increase year-over-year and a 0.3% rise month-over-month. The monthly rise, influenced by persistently high housing costs, slightly exceeded the anticipated 0.2% increase. Following the core inflation data, traders estimate an 87% probability that the Federal Reserve will implement a 25 basis points rate cut during its meeting on September 17-18, marking the first rate cut since March 2020.
The unadjusted yearly increase in wholesale prices fell to 1.7% from 2.1% the previous month, reaching its lowest level in six months. The 12-month rate ticked up to 3.3% from 3.2%. Additionally, the price of services rose by 0.4% in August, resulting in a 12-month increase of 2.7%, which is near pre-pandemic levels.
Paul Ashworth, chief North American economist at Capital Economics, shared with MarketWatch that the August Producer Price Index (PPI) data offer positive signs that inflation is under control. Federal Reserve Chair Jerome Powell has suggested that interest rate cuts might be possible in September if inflation continues to decline and the job market remains subdued. "It's time for policy adjustments," Powell remarked in late August.
The Federal Reserve has kept its benchmark overnight interest rate steady at 5.25%-5.50% for the past year, following significant hikes of 525 basis points in 2022 and 2023. Investors have been speculating about a potentially larger-than-usual rate cut of 50 basis points, driven by easing inflation and a cooling job market, rather than the standard 25 basis points.
The aggressive rate hikes implemented by the Fed in the past two years were aimed at curbing demand, which in turn slowed hiring and contributed to a deceleration in the labor market. Despite concerns that the U.S. might face a recession due to these rate hikes, the recent easing of inflation has fueled hopes for a soft landing. While the Fed remains committed to reducing the inflation rate to 2%, investors had hoped that the August inflation data would prompt the Fed to consider significant rate cuts in their upcoming meeting.
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In conclusion, the August Producer Price Index data indicates promising signs that inflation may be under control, which could influence the Federal Reserve's upcoming decisions. With Federal Reserve Chair Jerome Powell suggesting that rate cuts might be possible if inflation continues to trend downwards and the job market remains stable, investors are closely watching for any signs of significant policy adjustments. Despite the Fed's previous aggressive rate hikes aimed at cooling the labor market and curbing demand, easing inflation has led to renewed speculation about a possible larger-than-usual rate cut. As the Fed strives to achieve its 2% inflation target, the outcome of the upcoming meeting will be critical in shaping the economic landscape and determining the trajectory of interest rates.
