Hotter-Than-Expected PPI Clouds Fed’s September Rate Cut Outlook

Global FinDesk — A stronger-than-anticipated July Producer Price Index (PPI) report has sparked fresh concerns that U.S. businesses may soon pass rising costs on to consumers, potentially complicating the Federal Reserve’s rate-cut timeline.

The latest data shows wholesale inflation climbing 0.9% in July, sharply exceeding the 0.2% gain economists had projected. The core PPI, which excludes food, energy, and trade services, jumped 0.6%, marking the largest monthly increase since March 2022.

Tariffs May Be Fueling Price Pressures

Economists point to tariffs as a likely driver of the increases in goods subject to import duties.

“Tariff-exposed goods are rising at a rapid clip, indicating that the willingness and ability of businesses to absorb tariff costs may be beginning to wane,” said Matthew Martin, senior economist at Oxford Economics.

Earlier consumer price data suggested companies were largely absorbing higher costs rather than passing them along to customers. However, the latest wholesale inflation figures may signal that this buffer is wearing thin.

Market Expectations for Fed Cuts Shift

Prior to the PPI release, traders were pricing in a 100% probability of a September rate cut, according to CME Group’s FedWatch tool, which analyzes futures market data.

Following Thursday morning’s report, market sentiment shifted. By midday, investors saw more than a 9% chance that the Fed would hold rates steady, leaving borrowing costs unchanged for the remainder of the year.

BMO senior economist Jennifer Lee noted, “This emboldens those who are less dovish on the Fed that a September cut is not a done deal.”

The PPI data may bolster the Fed’s “wait-and-see” approach, providing policymakers with justification to delay easing monetary policy amid persistent inflation risks.