Producer Inflation Preview: The Hidden Factor That Could Tame CPI Enthusiasm

In the grand stage of economic ups and downs, there’s a saying that echoes like a mantra: “The last mile is the toughest.” This adage, it seems, finds a perfect resonance when it comes to understanding the inflation dynamics in the U.S.

After the twist in July’s consumer price index (CPI) report, in which the annual inflation rate ticked up to 3.2%, albeit slightly below the anticipated 3.3%, the spotlight now shifts to the impending release of the producer price index (PPI) inflation gauge on Friday.

As the Federal Reserve steadily aims for a return to the 2% consumer inflation target, the prices faced by producers must not sprint ahead once again, lest a domino effect hits the end consumer products.

Yet, a chilling revelation might be on the horizon.

July’s PPI Report: What Do Economists Foresee?

• The median economists’ consensus projects a noticeable bump in the annual PPI for final demand, moving from a marginal 0.1% uptick in June to a more substantial 0.7% climb in July. That would snap a series of 12 consecutive declines in the annual PPI inflation rate.

• On a monthly basis, the PPI index is expected to have accelerated by 0.2% in July, leaving behind the 0.1% from June.
  
• The core PPI index is anticipated to show a year-on-year increase of 2.3% for July, just a tad lower than June’s 2.4%.
  
• On a monthly scale, the core PPI is also slated to advance at a 0.2% pace, edging up from the 0.1% witnessed in June.

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Chart: June’s PPI Inflation Plummeted To The Lowest Level Since August 2020

Commodities Rose In July, Traders Believe Fed Is Done With Hiking

July emerged as a positive month for global commodities, which posted an increase not seen since March 2022.

The Bloomberg Commodity Index, which is closely tracked by the iShares Bloomberg Roll Select Commodity Strategy ETF CMDY surged almost 6% last month, after rising 3.5% in June.

Rising commodity prices may affect the overall producer price index as the weight for final demand goods in the PPI basket hovers at about 30%.

However, investors are increasingly convinced the Fed is about to end its rate-tightening campaign.

The odds of leaving rates on hold in September according to Fed futures market pricing rose to over 90% on Thursday. The same odds relative to the November meeting amounted to 70%.

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