According to the US Bureau of Labour Statistics (BLS), US wholesale price pressures moderated in July, consequently keeping the US Federal Reserve (Fed) on track to reduce the rate on the Fed funds target in September. Markets are still pricing around -40 basis points of easing for the September meeting and -105 basis points of cuts for the year. Void of any broad upside deviation in tomorrow’s US Consumer Price Index (CPI) inflation report, this will likely ‘seal the deal’ for a rate reduction in September.

PPI Inflation Slows

Unquestionably, the July Producer Price Index (PPI) was a miss across the board, sending the US Dollar Index and US Treasury yields lower and underpinning US equity index futures and spot gold (XAU/USD). Interestingly, the majority of the inflation at the wholesale level was due to goods inflation rather than services. Final demand for goods rose +0.6%, with the BLS underscoring that the advance was led by a +2.8% increase in gasoline prices, alongside categories of food, particularly fruits and beef. On the other hand, final demand for the services sector slowed to +0.2% in July, marking the largest fall since early 2023 and snapping six months of consecutive gains. The BLS noted: ‘The July decline can be traced to the index for final demand trade services, which dropped 1.3 percent’.

Headline PPI inflation (final demand) eased to +2.2% (YoY) in July from June’s reading of +2.6% (market consensus: +2.3%), with core PPI inflation (excludes food and energy prices) also cooling to +2.4% in July (YoY), down from +3.0% in June (market consensus: +2.7%). Between June and July 2024, PPI inflation rose +0.1% at the headline level (down from +0.2%) and was flat according to the core print (from +0.4%).

US CPI Inflation Ahead

Following today’s data, CPI inflation will hit the wires tomorrow at 12:30 pm GMT.

The FP Markets Research Team noted the following in the week-ahead post:

Headline CPI inflation is expected to remain at +3.0% in July (YoY), matching June’s print (estimate range between a high of +3.1% and a low of +2.9%), while core inflation – removes energy and food price components – is forecast to slow to +3.2% in July (YoY) from +3.3% in June (estimate range between a high of +3.3% and a low of +3.1%).

Were a broad downside surprise in the data to unfold this week, we can expect rate cut bets to increase this year and investors to perhaps fully price in 50 basis points of easing for September’s meeting; this would also likely send the US dollar (USD) and US Treasuries southbound. On the contrary, an upside surprise could have investors pare back rate cut bets as it may tempt the Fed to tread carefully regarding reducing rates, thus underpinning the USD and yields.

For those watching the US Dollar Index ahead of tomorrow’s CPI report, this analysis remains active as the Index looks poised to return to support.

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