U.S. Producer Prices Fall in August, Boosting Case for Fed Rate Cut
U.S. factory-gate prices unexpectedly declined in August, signaling softer-than-expected inflationary pressures. The drop could strengthen the argument for the Federal Reserve to lower interest rates at its upcoming policy meeting.
Producer Price Index Declines
The producer price index (PPI) for final demand slipped by 0.1% in August, according to the Bureau of Labor Statistics. Economists had expected a 0.3% rise, following July’s upward revision to a 0.7% increase.
Services were the main driver of disinflation, with the final demand services index falling 0.2% — the sharpest drop since April. This decline offset a modest 0.1% increase in goods prices. Analysts noted that prices in categories tied to U.S. tariffs, such as apparel, textiles, household furniture, and motor vehicles, remained muted.
Why It Matters for the Fed
The PPI is closely watched because parts of the data feed into the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge. The August PCE reading is due on September 26, after the Fed announces its interest rate decision.
Economists say the weaker PPI data makes a 25 basis point rate cut almost certain, with some investors pricing in a small chance of a larger 50 basis point reduction. The Fed’s dual mandate — maximum employment and stable prices — remains central to its decision.
Market Reaction
Following the PPI release, S&P 500 and Nasdaq futures moved higher. At the same time, yields on the 2-year and 10-year U.S. Treasury notes fell, reflecting investor expectations of lower borrowing costs. Yields typically decline when prices rise.
Analysts at Capital Economics noted that tariff effects are feeding into inflation only slowly, easing concerns that higher duties could significantly disrupt the Fed’s outlook.
