PPI Data Below Expectations, Inflation Pressure Remains Controlled
Data released on Thursday shows that the U.S. Producer Price Index (PPI) for May maintained a moderate increase, indicating inflation has not been significantly impacted by new tariff measures. This has also strengthened market expectations for a potential Fed rate cut in September.
According to the U.S. Bureau of Labor Statistics, the PPI rose 2.6% year-on-year in May, matching expectations. It climbed 0.1% month-over-month, which is below the expected 0.2%. The core PPI, excluding food and energy, increased by 3.0% year-on-year, the lowest since August 2024, and below the anticipated 3.1%. It also rose 0.1% month-over-month, again underperforming the expected 0.3%.
As an essential indicator of price changes on the production end, PPI data is often viewed as a harbinger for future consumer price trends. Thus, the modest performance of this data has become a focal point and positive news for the market.
Moderate Rise in Wholesale Prices, Egg Prices Slightly Rebound
Breaking down the data, wholesale energy prices remained stable overall, though gasoline prices rose by 1.6% month-over-month. After a 0.9% drop in April, food wholesale prices nudged up 0.1% in May. Egg prices increased by 1.4% month-over-month, garnering significant market attention despite the moderate rise, reflecting mounting consumer pressure.
Stephen Brown, an analyst at Capital Economics, pointed out that parts of the PPI data are directly used to calculate the PCE price index — the Fed's favored measure of inflation when setting interest rate policies.
Tariff Policy Impact Awaiting, Corporate Profits May Be Pressured
Since taking office earlier this year, Trump has imposed a 10% baseline tariff on major trading partners and set higher rates for products like steel, aluminum, and automobiles. Although the transmission effect of tariffs on prices has not been significant in the short term, some economists are concerned that companies may pass some tariff costs onto end consumers in the second half of the year, increasing inflationary pressure.
Carl Weinberg, chief economist at High Frequency Economics, commented, "Without the tariffs imposed by Trump, the Fed might even consider an earlier rate cut to stimulate the economy."
Weak Job Data Increases Rate Cut Probability
Additionally, the latest data from the U.S. Department of Labor shows that the adjusted initial claims for unemployment benefits for the week ending June 7 were 248,000, the highest since October last year, exceeding the market's expectation of 240,000. Continuing claims for unemployment benefits also rose to 1.951 million, the highest since November 2021, indicating a weakening labor market.
The moderation in both employment and inflation data further enhances market expectations for a monetary easing policy. According to the CME "FedWatch" tool, the market currently anticipates an 80% probability of a Fed rate cut in September, significantly higher than the previous day's 70%.
Is the Window for Policy Shift Nearing?
The current inflation and employment data provide the Fed with more room for adjustment. Although Powell remains cautious, market sentiment has shifted. Against the backdrop of fiscal pressure, tariff disruptions, and slowing employment, the Fed may face a crucial turning point this fall. The market is waiting in anticipation to see if a significant rate cut will indeed occur as expected.
