The PPI stands for Producer Price Index. The reason it’s important as a measure of inflation, is generally, producers see an increase in prices first. When those producers pass on price increases to consumers, we then see that as inflation reflected in a higher CPI (consumer price index) or PCE (personal consumption expenditures).
I’ve been critical in the past, but this shows improvement.
Last month, the June PPI was much higher than expected. July’s surprise went the other way with the PPI up 0.1% and the Core PPI flat vs last month. Expectations were for a 0.2% for both. Annual PPI inflation was a respectable 2.2% which was well below expectations of 2.6% and below last month’s surprisingly high 2.7%. The Core PPI was up 2.4% vs last year which was below expectations of 2.4% and below last month’s 3.0%. That Core number is still a little high, but if the Fed is aiming for 2%, that 0.3% decrease is meaningful. Change in final demand less food, energy, and trade was 3.3% which was a small increase from last month’s 3.2%.
Overall, this was a very positive report for those who want to see lower inflation and a lower fed funds rate. The one area of concern I saw in the report was a monthly increase in pricing for final demand goods of 0.6%. That’s a big increase, and one we warned about in this week’s 5 Things to Know in Investing. Much of that increase was offset by a decrease in pricing for previously sticky final demand services.
Most will correctly conclude that this report makes an already-likely September rate cut by the Federal Reserve to be even more likely. I now agree with that conclusion. The two things that could change this narrative are a high CPI print tomorrow, or significant revisions to today’s PPI numbers. As a reminder, last month, not only was the June PPI higher than expected, but the May report was revised upwards by a significant amount.
So, the real conclusion is that today’s data leans towards an upcoming Fed rate cut, but today’s numbers may be revised next month.
IR@DeepKnowledgeInvesting.com if you have any questions.
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