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Earlier this week, government data showed that U.S. producer prices unexpectedly fell in August.
Earlier this week, government data showed that U.S. producer prices unexpectedly fell in August, pointing to weaker-than-expected inflation pressures and strengthening the case for the Federal Reserve to cut interest rates at its upcoming monetary policy meeting.
The producer price index for final demand fell 0.1% last month, according to data from the Bureau of Labor Statistics released Wednesday. Economists had expected the month-on-month measure to rise 0.3% in August, following a downwardly revised 0.7% gain in July.
Services were the main source of disinflation in August. The final demand services index fell 0.2%, the steepest drop since April, and helped offset a 0.1% rise in goods prices.
Prices in categories such as clothing, textiles, home furnishings and autos, which are seen as more exposed to the massive U.S. tariffs, were also “fairly muted,” analysts at Vital Knowledge said.
Investors are watching the PPI figure closely because some of the data is used to determine the Fed's preferred inflation metric.
Economists will now likely be looking at how the PPI result will impact the August PCE price index, which is due out on Sept. 26. However, those numbers will be released after the Fed announces its latest interest rate decision next week.
"The Fed has little to worry about regarding the PPI components that drive the core PCE deflator, as they have been broadly consistent with their averages in recent months," Stephen Brown, deputy chief economist for North America at Capital Economics, said in a note. Brown added that the unexpected decline in the PPI suggests that "the effects of the tariffs are only gradually kicking in."
On Tuesday, before the PPI data was released, Deutsche Bank analysts estimated that there was “still scope for the first round of tariffs” to have a larger impact on near-term inflation, particularly through price increases for “import-heavy goods that have not yet seen tariff impacts, and medium-import goods and services that have not yet shown significant increases relative to their 2024 trends.”
“In addition, the August round of tariffs is expected to add another five percentage points or so to the average tariff rate, raising core goods prices by another 1.2 percentage points and the core PCE price level by another 40 basis points, depending on the ultimate degree of tariff pass-through.”
Meanwhile, the BLS’s separate measure of consumer price inflation was 2.9% in the 12 months through August, up from 2.7% in July, in line with economists’ expectations. On a monthly basis, inflation was 0.4%, faster than the 0.2% in the previous month and slightly above expectations of 0.3%.
While some large companies have already reported price increases, the impact of tariffs on the August consumer price index was "less pronounced," Morgan Stanley analysts said.