Producer Inflation Could Tee Up Traders For Crucial Consumer Price Index Release

This week is packed with inflation data for investors to digest, starting with the U.S. government’s release of the Producer Price Index (PPI) report for July on Tuesday, followed by the highly anticipated Consumer Price Index (CPI) on Wednesday.

As economists expect producer prices cooling in July, the PPI could provide early signs of easing price pressures in the economy, offering potential optimism to markets ahead of the CPI report.

Currently, investors assign a 48% chance of a 50-basis-point rate cut in September, slightly lower than the 52% probabilities assigned to a smaller interest rate reduction by the Federal Reserve, as CME Group FedWatch tool shows Monday.

Producer Price Index Report: What Economists Expect

• Economist consensus tracked by TradingEconomics expects the headline PPI for final demand to edge up by 0.1% month-over-month in July, a slowdown from the 0.2% increase in June.
• On a yearly basis, the headline PPI is anticipated to be 2.3% higher than in July 2023, down from the previous 2.6% gain.
• Excluding energy, food and trade services, the core PPI is expected to rise by 0.2% monthly in July 2024, cooling from the 0.4% increase seen in June.
• Compared to July 2023, the core PPI is forecasted to increase by 2.7%, down from the 3% rise recorded in June.

Also Read: Markets Experience Best And Worst Days Since 2022: What’s Next In Wall Street’s Rollercoaster Ride?

Insights From Recent Business Survey Data

Recent data from the Institute for Supply Management (ISM) Prices Index for the manufacturing sector showed a reading of 52.9% in July, up from 52.1% in June. This indicates that raw material prices increased in July for the seventh consecutive month after eight months of declines.

Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted that 23% of companies reported higher prices in July, compared to 20% in June.

Chris Williamson, chief business economist at S&P Global Market Intelligence, highlighted that in the manufacturing sector, “input cost inflation cooled for a second month after having risen to a 13-month high in May.” However, he also indicated that service providers saw a further sharp rise in input costs, driven by higher wage and transportation expenses.

How Markets Reacted To Previous PPI Report

The latest PPI report for June, published on July 12, showed a slightly hotter-than-expected outcome. The headline PPI for final demand increased by 0.2% month-over-month, up from the flat reading in May and exceeding economists' expectations of a 0.1% increase.

The core PPI rose at a 0.4% monthly pace, up from May's 0.3% growth and outpacing estimates of 0.2%.

The June PPI report was released after a sharper-than-expected drop in the June CPI inflation gauge, leading to the following market reactions on July 12:

• The S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, rose 0.6%.
• The tech-heavy Nasdaq 100, tracked by the Invesco QQQ Trust QQQ, also gained 0.6%.
• U.S. Treasury bonds, followed by the iShares 20+ Year Treasury Bond ETF TLT, closed 0.4% higher.
• Gold, tracked by the SPDR Gold Trust GLD, ended 0.2% lower.
• Oil prices, monitored through the United States Oil Fund USO, declined by 0.9%.

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