A Hotter PPI, CPI Reinforces the Need for a Tempered Path of Policy Easing

This morning, the PPI rose 0.2% in August, a tenth of a percentage point more than expected and following no change the month prior. Year-over-year, producer prices rose 1.7% in August, down from the 2.1% annual gain in July and marking the smallest annual increase since February.

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Food prices rose 0.1%, while energy prices dropped 0.9% in August following a 1.8% increase the month prior. Excluding food and energy costs, the core PPI rose 0.3%, a tenth of a percentage point more than expected and following a 0.2% decline in July. Year-over-year, the core PPI increased 2.4% in August, up from the 2.3% annual gain in July and the largest annual increase in two months.

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Additionally, services costs rose 0.4%, due to a 0.6% rise in trade costs. Transportation and warehousing costs, however, fell 0.1% in August.

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Yesterday, the CPI rose 0.2% in August, as expected and following a 0.2% increase in July. Year-over-year, consumer prices rose 2.5%, as expected and down from the 2.9% annual increase in July. At 2.5%, this marks the smallest annual gain since February 2021.

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Food prices rose 0.1%, while energy prices dropped 0.8% in August following no change the month prior. Excluding food and energy costs, the core CPI rose 0.3% in August, a tenth of a percentage point more than expected and following a 0.2% gain in July. Year-over-year, the core CPI increased 3.2% for the second consecutive month, in line with expectations.

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In the details of the report, transportation prices rose 0.1%, thanks to no change in new vehicle prices and a 1.0% drop in used cars and trucks prices, the third consecutive monthly decline. Additionally, airline fares jumped 3.9%, following five consecutive months of a decline. Meanwhile, shelter prices rose 0.5% with a similar gain in the OER, up from the 0.4% rise in July. Also, other goods and services costs rose 0.2%, and education and communication prices rose 0.1% in August. On the other hand, recreation prices decreased 0.1%, medical care prices also fell 0.1%, and commodities prices slipped 0.1% in August.

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Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.3% in August following a 0.2% rise the month prior. Over the past 12 months, the supercore increased 4.5%, up from the 4.4% annual increase in July and the largest annual gain in two months.

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Bottom Line: This morning’s hotter-than-expected read on the PPI coupled with yesterday’s hotter read on the core CPI, thanks to a larger increase in shelter and airline fares, underscores the Committee’s lingering focus on inflation. While continuing a disinflationary trend and supporting the Fed’s intentions to open the door to rate cuts in less than one weeks’ time, the ongoing uncertainty and unevenness in price growth reinforces the need for a slow and tempered approach to policy adjustment as the data continue to evolve.

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In fact, if the Fed did make a more sizable policy adjustment in September, the market would likely misread or misinterpret such action as an intention to rush back to an accommodative stance as opposed to simply reduce policy firming as inflation moves close to the target.

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As such, at least for now, a 50bp cut is off the table for September. According to the CME FedWatch tool, the probability has slipped from 59% as Friday’s open to just 17% following this morning’s report.

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On the international front, as the Fed presumably gears up for its first-round rate cut, the European Central Bank (ECB) cut interest rates for the second time in three months, lowering the deposit rate by 25bps to 3.50% earlier this morning. The ECB cut its growth forecast for every year through 2026, with growth revised down from 0.9% to 0.8% this year, and from 1.4% to 1.3% next year. In 2026, growth is expected to be 1.5%, down from a previous forecast of 1.6%. The ECB, however, left its inflation forecasts unchanged at 2.5%, 2.2% and 1.9% for this year, next year and 2026, respectively.

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While opting to continue with rate cuts, with inflation still elevated, at the post-meeting press conference, ECB President Christine Lagarde noted the ECB “will be sufficiently restrictive for as long as needed.”

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Along with the CPI, yesterday, MBA mortgage applications rose 1.4% in the week ending September 6 following a 1.6% increase the month prior. The 30-year mortgage rate, meanwhile, dropped 14bps to 6.29%, marking the sixth consecutive weekly decline and the lowest since February.

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Today, along with the PPI, initial jobless claims ticked up from 228k to 230k in the week ending September 7, the first increase in three weeks. The four-week average rose slightly from 230k to 231k, albeit still well within the relatively low range established over the past two years. Continuing claims, or those claiming ongoing unemployment, rose slightly from 1.845M to 1.850M in the week ending August 31.

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Tomorrow, import prices are expected to fall 0.2%, and export prices are expected to decline 0.1% in August. Also tomorrow, the preliminary September consumer confidence index from the University of Michigan is expected to rise from 67.9 to 68.3.

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-Lindsey Piegza, Ph.D., Chief Economist