What a Surprising Drop in Wholesale Inflation May Mean For a Potential Fed Rate Cut
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Key TakeawaysThe Producer Price Index showed wholesale prices increased by 0.1% in July, less than analysts expected.A decline in certain index components pointed to a lower reading for the Personal Consumption Expenditure index, the Federal Reserve's preferred measure of consumer inflation.The surprising reading could give the Federal Reserve more confidence that inflation is moving toward its annual goal of 2%.
Prices for wholesalers rose less than expected in July, potentially giving the Federal Reserve more confidence to cut interest rates.The Producer Price Index (PPI) showed that price increases eased in July, a Bureau of Labor Statistics report said Tuesday. The index was up 2.2% over the year ending in July, while prices increased 0.1% over the month. Both readings were lower than analysts projected, and the surprise fortified confidence among economists that inflation was continuing its decline.Slower price increases could set the Federal Reserve up for a highly anticipated interest rate cut in September. “The runway is clear for the Fed to cut rates in September. If data like this persists, the Fed will have plenty of room to cut rates further this year,” said Jamie Cox, managing partner at Harris Financial Group in Charlotte, North Carolina.Data Points to Decline in Fed’s Preferred Inflation MeasurementEconomists look at PPI as an indicator of future consumer inflation trends because price increases at the wholesale level are often passed on to shoppers. Elements of the PPI are also used to calculate the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation.“Categories of the PPI that feed into the PCE have been cooling,” wrote KPMG Macroeconomist Meagan Martin-Schoenberger on X, pointing to improvements in costs for airfare, health insurance and auto insurance.Because of that easing, economists said Tuesday's report likely bolsters Federal Reserve officials' confidence that inflation is moving toward its annual 2% goal."A softer-than-expected rise in producer prices adds to evidence of falling price pressures that will help tame PCE inflation in the back half of 2024,” wrote Nationwide Financial Markets Economist Oren Klachkin. "A better balance in the product and labor markets will temper inflation and set the Fed down the path of rate cuts, starting in September.” Read the original article on Investopedia.
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