While the producer price index came out slightly higher than forecasted at 0.3% on the month and 1.7% on a year-ago basis on Thursday, it remained on a moderating trend with July’s number being revised down.
For 18 consecutive months, producer inflation has been in the 2% range or below on a year-ago basis, continuing to reaffirm our call that the economy has achieved a soft landing.
Together with the consumer price index data released on Wednesday, the August producer price index data suggested that the Federal Reserve’s most preferred inflation metric—the personal consumption expenditures price index—should grow at 0.2% on the month for all items and for the core metrics.
If our forecasts are correct, the headline year-over-year PCE inflation should come in at 2.3%, the lowest since the start of 2021. Meanwhile, the core year-over-year number should inch up slightly to 2.7% from 2.6% earlier.
We think given how the economy is cooling, especially the labor market, Thursday’s data on inflation and the projections for PCE inflation should be more than enough for the Fed to go ahead with its first rate cut in this cycle next week.
But with core inflation remaining somewhat elevated, we don’t see any reason for a 50 basis-point cut as long as the Fed is determined to keep inflation under control as it has been emphasizing.
Read more of RSM’s insights on inflation, the economy and the middle market.
Last week’s initial jobless claims data continued to suggest that the labor market, while cooling, is not weakening. New claims remained stable at 230,000, up only slightly from the previous week.
Still, because monetary policies always work with a long and variable lag, we have continued to make the case that the Fed should not wait to see labor market cracks to appear for it to act.
The takeaway
Now is the time to begin cutting rates to give the economy its much-needed boost in the post-pandemic era.
The PPI number highlighted the fact that shelter prices remain the key problem within core inflation. Because the PPI data does not include shelter prices, it has been at or even under the 2% target for more than a year now, while other core inflation metrics like CPI and PCE stay sticky above the 2% target.
Trade services, a proxy for retail and wholesale margin, bounced back in August, rising by 0.6% on the month, after dropping by a sharp 1.7% in July. That implied a demand rebound in August, when businesses could widen their margins by a healthy amount.
