The Producer Price Index (PPI) for final demand slipped 0.1% in August, offering the Federal Reserve fresh leeway to consider lowering interest rates at its meeting later this month.
The decline marked a sharp contrast with Wall Street expectations, which had pointed to a 0.3% monthly increase, according to economists polled by Reuters.
On an annual basis, producer prices rose 2.6%, well below the anticipated 3.3% gain.
The softer reading helped ease market concerns over stubborn inflation and set the stage for what investors expect will be the Fed’s first rate cut since December 2024.
Core PPI, which strips out volatile food and energy components, also fell 0.1% against estimates of a 0.3% rise.
Prices for final demand services declined 0.2% during the month, outweighing a modest 0.1% increase in goods.
Inflation backdrop strengthens policy shift
Despite the headline cooling, underlying measures showed mixed signals.
Prices for final demand excluding foods, energy, and trade services climbed 0.3%, extending a four-month streak of increases.
That measure rose 2.8% over the past year, its fastest pace since March 2025.
Still, the broader message for policymakers is one of easing pressures.
With inflation moving lower from last year’s highs and economic growth showing signs of fatigue, the Fed has more room to manoeuvre.
“The inflation news over the next couple of days would have to be remarkably hotter than anticipated for anything to change the narrative that we’re getting a rate cut in September,” Art Hogan, chief market strategist at B. Riley Wealth Management told CNBC.
Markets fully price in a cut; all eyes on CPI report
Financial markets reacted swiftly to the PPI release.
Futures tied to the S&P 500 and Nasdaq extended gains, while Treasury yields eased as traders reinforced bets on lower borrowing costs.
Futures pricing now implies a 100% probability of a September rate cut, according to CME FedWatch data, with most investors expecting a reduction of 25 basis points.
The decision will be accompanied by an update on the Fed’s economic projections, offering insight into how many cuts may follow.
The CPI report, due Thursday, will provide another key data point.
Economists surveyed by Dow Jones expect consumer prices to have risen 0.3% in August, both at the headline and core level.
If confirmed, annual headline inflation would climb to 2.9%, while the core rate would remain steady at 3.1%.
Trump tariffs and employment complicate outlook
The Fed has resisted pressure to ease policy earlier this year, wary of the inflationary effects of President Donald Trump’s sweeping tariffs on imports.
Though past episodes suggest tariffs have limited lasting impact on prices, the scale of Trump’s measures has left officials cautious.
Trump has repeatedly called on the Fed to cut rates, arguing that tariffs are non-inflationary and that lower borrowing costs are needed to spur growth and contain interest expenses on the ballooning national debt.
At the same time, cracks have begun to appear in the labour market.
The Bureau of Labor Statistics recently revised down its jobs tally, showing nearly 1 million fewer positions created in the year through March 2025 than previously reported.
While Fed officials have consistently described employment conditions as solid, the revision underscored the risks of a weakening jobs backdrop.
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