The current PPI news is positive for inflation, which will be even better when the Labor Department releases its July Consumer Price Index report!
Further confirming that the price increases at the beginning of the year were either a fluke or a last-ditch effort for inflation, a positive CPI reading could mean the Fed is able to turn its sights to other economic challenges, such as a slowing labor market.
"Right now, the inflationary pressures you've seen have dissipated significantly," said Jim Baird, chief investment officer at Plante Moran Financial Advisors. "Inflation is pretty much a non-issue right now. There's a broad expectation that the worst is over."
Like the rest of Wall Street, Baird expects the Fed to shift its focus from tightening to fighting inflation in September, adopting a more accommodative policy to avoid a possible weakness in the employment situation.
While consumers and business owners continue to express concerns about high prices, the tide has indeed changed. The July Producer Price Index (PPI) report released on Tuesday helped confirm optimism that the inflation numbers that started in 2021 and surged again in early 2024 are a thing of the past.
The PPI report, a measure of wholesale inflation, showed prices rising just 0.2% in July and about 2.2% from a year earlier. The figure is now very close to the Fed's 2% target, suggesting that the market's impulse for the central bank to start cutting interest rates has largely been achieved.
Economists surveyed by Dow Jones expect the CPI to rise 0.2% as well, including the all-e-item index and the core index excluding food and energy. However, the 12-month CPI gains are expected to be 3% and 3.2%, respectively - well below the highs in mid-2022, but still well below the Fed's 2% target.
Still, investors are looking for the Fed to start cutting rates at its September meeting, given that inflation is weakening and the labor market is also weakening. The unemployment rate has now risen to 4.3%, up 0.8 percentage points over the past year, triggering the time-tested recession signal known as the Sam's Rule.
