June Producer Inflation Exceeds Forecasts, Restrains Investor Euphoria Following Consumer Price Relief

The Producer Price Index released Friday revealed a higher-than-expected increase in June, surprising investors who had grown confident about interest rate cuts following the sharper-than-anticipated drop in the monthly Consumer Price Index inflation gauge released a day earlier.

On an annual basis compared to June 2023, the overall producer basket rose by 2.6%, reaching its highest point since March 2023.

June PPI Report: Key Highlights

In June, the headline PPI for final demand rose by 0.2% month-over-month, rebounding sharply from the upwardly revised flat reading in May and surpassing economists’ expectations – as tracked by TradingEconomics – of a 0.1% increase.
The June rise in the index for final demand is attributed to a 0.6% monthly increase in prices for final demand services, while the index for final demand goods decreased by 0.5%.
The 2.6% annual surge in the headline number represented a 0.2 percentage point increase from the upwardly revised May print, and topped estimates of 2.3%.
The core PPI – which tracks prices for final demand less foods, energy, and trade services – advanced at a 0.4% monthly pace, advancing from May’s upwardly revised 0.3% growth and surpassing estimates of 0.2%.
On an annual basis, the core PPI climbed by 3.1%, up from the previous 2.3% and marking the highest rate of increase since April 2023.

Market Reactions

Prior to the PPI report, traders had assigned a nearly 95% chance on a September rate cut, according to CME Group‘s FedWatch tool.

The hotter-than-expected reading may now temper these heightened expectations, though it is unlikely to derail them altogether given the Federal Reserve’s stronger emphasis on consumer price trends.

Futures on major U.S. equity averages traded flat in Friday’s premarket trading. Treasury yields inched slightly higher across the board and the dollar recouped early session losses against peers.

On Thursday, tech stocks sold off despite a lower-than-expected CPI report, with the Invesco QQQ Trust QQQ tumbling 2.2%. Small caps rallied instead, with the iShares Russell 2000 ETF IWM roaring 3.6%, achieving the highest level since January 2022.

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