Wholesale Price Inflation Accelerates in June

A key macro indicator came in hotter than expected, but markets are now more confident than before about the inevitability of rate cuts.

What’s the Scoop?

• Hotter PPI: June CPI data released yesterday showed the first instance of consumer prices deflation since May 2020, yet producers experienced a 0.2% increase to prices over the same period and their stickiest “core” inputs experienced a 0.4% increase, double analyst expectations.
• Cuts Reaffirmed: While year-over-year PPI at 2.6% remains above the Federal Reserve’s long term 2% inflation target, Chair Powell hinted at his desire to cut prior to hitting the target earlier this week. As a result of today’s PPI, Bank of America lowered its expectations for June core PCE (the Fed’s preferred inflation metric) and markets are now pricing in an 88% chance of at least one cut by September, up 3% from yesterday.

Bankless Take:

Although producer prices ticked up marginally in June, it is clear that interest rate markets are preparing for more softening inflation data that will allow the Fed to cut. While the cost of producers’ goods and services are falling, their price inputs are increasing, a trend likely to result in pressures on corporate profitability that could force producers to further slash prices to capture consumer demand, commencing the actual downside to this prolonged business cycle.