Financial institutions keep a watchful eye on the Federal Reserve as highly anticipated figures for Producer Price Index (PPI) and unemployment rates approach release
The Federal Reserve's decision on interest rates at its upcoming meeting on September 17th is hotly anticipated, with markets still expecting a 25-basis-point cut, despite the chances of a larger 50-basis-point cut evaporating after the latest Producer Price Index (PPI) release.
The PPI, an early indicator of inflationary pressures at the wholesale or manufacturer level, rose by 0.9% in July, more than expected. Food costs accounted for 40% of the July increase in goods prices. This rise in the PPI could potentially signal upcoming increases in the core Personal Consumption Expenditures (PCE) inflation, the Fed's preferred gauge, but economists predict that July's core PCE index may rise by only 0.26%.
The labor market, however, continues to show strength. New jobless claims dipped to 224,000, signaling resilience in the labor market despite tariff pressure. Continuing claims eased to 1.953 million, indicating fewer Americans are relying on extended benefits.
Distributor margins also jumped 2% in July, a positive sign for businesses. However, the Trump administration's push for aggressive rate cuts and the ongoing tariff-related cost pressures could challenge the Fed's decision-making process.
Deere (DE) slumped on a tempered earnings outlook amid pressure from Trump administration tariffs. The S&P 500 fell modestly in early Thursday trading, reflecting the market's uncertainty.
The PPI's impact on the core PCE index is indirect, as it captures price changes at earlier stages in the supply chain, such as manufacturing and wholesale, before those costs translate into consumer prices. The core PCE, on the other hand, reflects consumer spending patterns and adjusts for substitution effects, making it more comprehensive.
While rising PPI can precede and contribute to increases in the core PCE if manufacturers pass higher costs onto consumers, not all PPI changes translate directly to core PCE changes. Some producer price changes may be absorbed by businesses or mitigated by consumer behavior changes reflected in the PCE’s consumption-weighted approach.
Every new data release, from CPI to PCE, will carry added weight in the countdown to September's Fed meeting. The Fed may balance tariff-related cost pressures with the risk of economic slowdown to make its decision.
[1] The PPI affects the Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, indirectly as an early indicator of inflationary pressures at the wholesale or manufacturer level before they reach consumers. [2] The core PCE reflects consumer spending patterns and adjusts for substitution effects, making it more comprehensive and the Fed's preferred inflation measure. [3] When PPI rises, it can precede and contribute to increases in the core PCE if manufacturers pass higher costs onto consumers. [4] However, not all PPI changes translate directly to core PCE changes, as some producer price changes may be absorbed by businesses or mitigated by consumer behavior changes reflected in the PCE’s consumption-weighted approach. [5] Recent data showed PPI rising modestly (2.3% year-over-year) while core PCE rose slightly faster (~2.8% annually), indicating some passthrough of producer price changes to consumer inflation but with moderation.
- The rise in the PPI could potentially signal upcoming increases in the core PCE index, a key measurement of inflation that the Federal Reserve closely watches as part of their decision-making process in finance and business.
- The Trump administration's push for aggressive rate cuts and the ongoing tariff-related cost pressures could challenge the Fed's decision-making process, as these factors, notably in the realm of business and finance, may influence the central bank's consideration of the overall economic health and the risk of an economic slowdown.
%20and%20unemployment%20rates%20approach%20release){kind=link}